CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
Compared with a forward contract, a futures contract most likely differs in pricing because the futures price:
Futures and forward prices can differ when interest rates are correlated with futures prices. Daily settlement creates interim cash flows that are reinvested or financed at varying rates, which a forward does not have. If rates are constant or uncorrelated, the prices are the same.
- Ais always lower than the forward price
- Bcan differ when interest rates are correlated with futures prices because of daily settlementCorrect
- Cequals the spot price at initiation regardless of carry
Explanation
Daily mark-to-market cash flows are reinvested or financed at changing rates. If rates correlate with futures prices, futures and forward prices can differ. The futures price is not always lower, and it does not equal spot at initiation.
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