Two contracts can lock in the same future price today and still be worth different amounts tomorrow. That gap is one of the most testable wrinkles in Level I derivatives.
The price of a forward or futures contract is the rate locked in today for a transaction at a future date. The value is what the contract is worth to a counterparty at any point in time. At initiation, both contracts are priced so value is zero on each side. No cash changes hands.
KEY: Price is set once at trade inception. Value fluctuates continuously with the underlying.
A forward is private, customized, and settled once at expiration. Between trade date and expiration, gains and losses accrue on paper but do not change hands. The value of a long forward at time t (with original forward price and current forward price ) is the present value of the price difference.
Common mistakes
- Blaming mark-to-market alone for the price difference. Daily settlement by itself is neutral. The gap appears only when rates correlate with the underlying. Trap: "futures > forward because daily settlement reduces credit risk."
- Reversing the correlation sign. Positive correlation → futures > forward. Negative → futures < forward. Trap: assuming bond futures trade above bond forwards.
- Conflating price and value. Price is locked at initiation. Value moves with the underlying. Trap: computing a positive "futures value at initiation."
Bottom line
- Forward and futures prices are equal when interest rates are constant or uncorrelated with the underlying
- Positive correlation between underlying returns and rates makes the futures price exceed the forward price
- Negative correlation between underlying returns and rates makes the futures price below the forward price, the canonical bond-futures case
- Mark-to-market resets futures value to zero each day, while forward value accumulates until settlement
Exam shortcut
When the prompt says "constant rates" or "uncorrelated," answer forward price = futures price and move on. For bond or interest-rate underlyings, default to futures < forward (negative correlation). For equity, FX, and commodity underlyings absent explicit guidance, treat the two prices as equal. Memorize "positive correlation → futures higher, negative correlation → futures lower" and every variant on this LO collapses to one rule.
The full lesson (about 1,606 words, 11 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- pricing and valuation of futures
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