During the Global Financial Crisis, somebody suggested suspending mark-to-market on margin accounts for futures contracts. (a) Explain what mark-to-market means. (2 marks)

(b) Explain the role of mark-to-market in terms its advantage in risk management for futures contracts relative to forward contracts. (2 marks)

(c) Identify one pro and one con of suspending mark-to-market during the financial crisis in terms of risks that investors face. (4 marks)

(d) The following table presents the daily evolution of futures price for two futures contracts, contract 1 and 2, from the date of initialization (day 0) to maturity (day 7), and the market interest rate used for the margin accounts. Which futures contract is expected to have a higher value at initialization? How does the value of each futures contract compare to the value of an otherwise-equal forward contract in the period post-initialization but prior to maturity? Explain your answers. (4 marks)

Date O (Initialization) Interest rate 0.09 0.08 2 Futures Price Contract 1 Contract 2 80 30 70 40 20 90 50 60 30 80 40 70 60 50 70 40 3 | 0.03 0.06 0.04 0.05 0.07 0.08 5 6 7 (maturity) Date O (Initialization) Interest rate 0.09 0.08 2 Futures Price Contract 1 Contract 2 80 30 70 40 20 90 50 60 30 80 40 70 60 50 70 40 3 | 0.03 0.06 0.04 0.05 0.07 0.08 5 6 7 (maturity)