Introduction of Marking to Market Euro FX Future

            Once you get involved in the future investment, you have to keep an eye on the future market rates to overcome the risk of loss. The value of future rates changes with two elements: changes in the spot rate and changes in the market forces. If the rate of currency increases for a certain period, future prices also increase, and more likely when rate decreases the prices will remain low and supplier may face the situation of loss (H.Hau, W., & Moore, 2002).

            If your transactions based on money, there is always a risk of future ups and downs which may lead you to the top or at the bottom. To avoid that risk, there should be investment till a margin.

         In case of marking to market, the futures market is fluctuating with day to day transaction which results in daily gains or losses which are settled with margin ratios, this process is known as marking to market process. To calculate the performance bond, it is necessary to take into consideration the following information and explanation;

Ø  Your performance bond current value is $1700, and the next three days prices are +1%, +2% and -2% respectively. Calculate the changes in performance bond from daily marking the market.

 Assume that the previous year price is $8 and the short position is at 5000 EURO.

Table shows that

Ø  The t represents the time of period after which market changes.

Ø  Previous year FV is $ 8 and the day first future prices are calculated as 1 % of $ 1700 = 17 and changes performance is ( 17 – 8) =  $ 9 and the estimated short position is 5000 EURO, which shows the gain of ( 5000 * 9) = $ 45000.

Ø  Day 2 future price is +2% of the current price and changes performance is (34 – 17) = $17 and the gain is (17 * 5000) = $ 85000 and cumulative margin is $ 176700.

Ø  Day 3 price is negative -2% of 1700, which show the negative value which can cause of loss but previous year profit margin could cover this loss and it ends with a cumulative profit of $ 306700. The further year prices may tend to fall but it depends upon the whole year market situation.                                             

The marking to market process helps to determine the investor to decide either he should invest his money in long- or short-term plans or should retain it in hand. In most cases, the contract is sold at the same maturity at zero. Whenever the contract sold at the same maturity, the net position is always zero (R.Portes & H., 1998).

References of Marking to Market Euro FX Future

H.Hau, W., K., & Moore, M. (2002). How has the euro changed the foreign exchange market?. Economic Policy, 17 (34), 149-192.

R.Portes, & H., R. (1998). The emergence of the euro as an international currency.