CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
Compared with a forward contract on the same asset and maturity, a futures contract most likely has a price that differs from the forward price when:
Futures and forward prices most likely differ when interest rates are correlated with futures prices. Daily settlement lets gains be reinvested or losses financed at rates linked to price moves, which a forward lacks; absent that correlation, prices are essentially equal.
- Athe futures contract is traded on an exchange
- Binterest rates are positively correlated with futures pricesCorrect
- Cthe underlying asset pays no income
Explanation
Daily marking to market means gains or losses are reinvested or financed at prevailing rates. When rates correlate with futures prices, this alters value relative to a forward, so prices differ. Exchange trading alone or no income does not cause a difference.
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