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Secondly, all open positions are marked-to-market on a daily basis. If at the end of a trading day the futures price has fallen from yesterday’s close then the accounts of the longs are debited with their losses and the accounts of the shorts are credited with their proﬁts. If the futures price has increased then the situation is the reverse. If a trader receives a variation margin call and does not send the required funds in time, the position will normally be closed out by his or her broker. There are three main types of end-users of futures, although the same organization or individual may take different roles in different circumstances.
The following example of an FX swap transaction uses the same spot rate and interest rates from previous sections. a. a. 4926 Imagine that a customer contracts a bank and agrees an FX swap transaction with the following terms: r Spot leg. The customer sells the bank £10 million and receives in return $15 million (at the spot rate). 6 FX swap cash ﬂows r Forward leg. 926 million (at the two-month forward exchange rate). 926 million on the forward leg, despite having received $15 million spot. The difference between the two amounts is $74 000.
R The buyer of the FRA is compensated in cash by the seller if the reference or benchmark interest rate for the contract period turns out to be above that agreed in the contract. Seller. The seller of the FRA contract is compensated by the buyer if the benchmark interest rate turns out to be below the contractual rate. The natural buyers of FRAs are corporate borrowers who wish to hedge against rising interest rates. Money market investors who wish to protect against declining interest rates are natural sellers of FRAs.