Marking-to-market and futures-forward differentials - further evidence from the foreign exchange markets

Abstract

The effects of marking-to-market on the pricing and hedging effectiveness of currency futures contracts are empirically examined. The pricing effect is examined by testing the statistical significance of the futures-forward price differentials of four currencies. The test uses (1) a procedure that matches both the observation date and the delivery date of futures and forward contracts, (2) a period that has volatile exchange rates and interest rates, and (3) a seemingly unrelated regression that takes into account of cross currency The findings are consistent with the theoretical correlations. prediction that the marking-to-market effect of futures contracts becomes significant in futures pricing in an environment with volatile exchange rates and interest rates.