Why a futures price differs from a forward price

Why would the prices differ? The key difference is the daily settlement of the futures contract. The investor in a futures contract must maintain a margin account. The key issue is the correlation between the spot price and the interest rate. If the correlation (spot, interest rate) is strongly positive, an increase in the spot implies an increase in the forward/futures value (recall delta equals approximately 1.0 for both). But only the futures contract is settled daily. In this case, an increase in value implies excess margin; the excess margin can be withdrawn from the margin account and (owing to the positive correlation) invested at a higher interest rate.

Category:

Education

Tags:

• Finance
• futures
• forward
• risk
• derivatives

[coolm1977]

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[badboy4life414]

David Harper = the king

[bezzer1185]

Great vid. Love all of them. Isn't the margin account invested in some sort of risk free securities? So, it does earn interest. I guess you just assume that there will be more favorable opportunities that you can use excess margins for.

[lukeallen]

really good videos. love your way of explaining things!

[mrkun]

@smokenfly514 Nope. The margin requirement is imposed by the exchange. Since forward contracts are traded over-the-counter (not on an exchange) there is no margin account.

[effective2]

Thanks for making these good quality educational videos.

[ngopalakrishna]

David, cant thank you enough. Thank you so much!

[manchesterunitedvind]

Love it!!! Keep going strong!!!!

[smokenfly514]

Are there margin requirements for forward contracts as well? If not, I don't get it

[yellowwitch1]

this guy is boring as hell!

[npatrick67]

Excellent!