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. Neither side pays the other for the contract, but opening a futures position does require posting initial margin.
KEY: Price is set at trade inception, and daily settlement then resets a futures price each day. 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. A forward's price is locked at initiation, while a futures price resets at each daily settlement. 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 puts 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 underlyings, default to futures price < forward price (negative correlation). For short-term rate futures quoted as 100 minus the rate, the lower futures price means a higher implied rate than the FRA (convexity bias). For equity, FX, and commodity underlyings absent explicit guidance, treat the two prices as equal.
The full lesson (about 2,544 words, 17 min read) adds 4 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- pricing and valuation of futures
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