Futures Prices vs. Forward Prices
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While a futures contract is priced in the same general manner as a forward contract, there are some small differences between futures and forwards.
- Because the daily gain/loss is settled daily on outstanding futures contracts via margin account transfers credit risk is eliminated. Alternatively, forward contracts can accumulate significant credit risk, as the value of the forward contract will change with changes to the price of the underlying asset.
- The margin accounts for futures contracts are invested in short term interest securities. This difference from forward contracts adds an element to the returns from futures contracts, affecting the pricing relationship.
- The pricing of futures contracts is affected by the correlation between interest rates and futures prices.
- When there is positive correlation the futures contract buyer benefits as he/she is gaining more from the margin account interest and the contract price is rising.
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