Future & Forward Price

Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Future & Forward Price

Postby swarnendupathak » Thu Sep 20, 2012 4:00 pm

Just came accross with very interesting derivation.
The difference between future & forward price is used in any derivation synonimously. But the two can be different if there exist a correration between spot price (sp) & risk free interest rate (rf).
Scenario 1: (Positive correlation between SP & Rf)
As unlike forward contract future contract attracts to deposit initial margin money for entering the contract. Suppose a Long Call option position can withdraw the excess money from his account for any positive movement in price over & above his initial margin. So when there is a positive correlation Rf will also rise & holder of a long call can invest the excess money with higher ROI, which makes Future price more than forwad price, where no margin is required to enter the contract.
Another, when the price Sp gets decreases than the K, the holder of a long CALL Option have to respond to the margin call, which he/she should borrow at increasing Rf from the market, which will also affect the future price against forward price.

Scenario 2: (Negative correlation between SP & Rf): Will be just opposite to the above.


Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Future & Forward Price

Postby content.pristine » Fri Sep 21, 2012 5:30 pm

Hi Swarnendu,

Just to sum up your observation:

If the correlation between the underlying asset and interest rates is positive, people would prefer going long in the futures contract (due to mark to market) and the futures price would therefore be higher than a comparable forwards contract..

The converse is true in case the correlation between the underlying asset and interest rates are negative..


Return to “FRM Part I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.