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CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts

An analyst compares a futures price with a forward price for the same underlying and maturity. If interest rates are positively correlated with futures prices, the futures price is most likely:

The futures price is most likely higher than the forward price. When rates rise with futures prices, daily mark-to-market gains are reinvested at higher rates and losses are funded cheaply, which favors the long futures holder.

  1. Alower than the forward price
  2. Bequal to the forward price
  3. Chigher than the forward priceCorrect

Explanation

With positive correlation, rising futures prices produce daily gains that can be reinvested at higher rates, and falling prices produce losses financed at lower rates. The long position benefits from daily settlement, so it is worth more than a forward and the futures price is higher.

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