Lesson 4 of 5 · 11 min
Why forward and futures prices can differ
Daily settlement makes futures gains and losses arrive earlier, so when futures prices move with interest rates, one contract becomes more valuable to hold and its price is bid above the other.
In short
- Both contracts have the same symmetric payoff at maturity; only the timing of cash flows differs (daily for futures, once for forwards).
- Forward and futures prices are identical if interest rates are constant, or if futures prices and interest rates are uncorrelated.
- Positive correlation: futures gains are reinvested at higher rates and losses financed at lower rates, so long futures is more attractive and .
- Negative correlation: long forwards are more attractive, so ; short futures are then the more attractive short position.
- The gap grows with interest rate volatility. For short maturities it is usually negligible.
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