Futures Contract Collateralization and its Implications

Defining a futures return as the rate of change of futures prices, as done in many empirical studies, implicitly implies that a futures contract is fully collateralized. We adjust futures' returns to explicitly account for holding the minimum margin (collateral) and the return to this collateral. Different collateral choices of the futures affect the dynamic properties of returns to futures contracts and modify their risk profile. In our empirical study, we document these discrepancies under full and partial collateralization. The discrepancy is minimal except when the futures prices and minimum margins are volatile. Our findings broadly verify the common belief that commodity futures serve as a good asset class for diversification purposes.