Flash Quiz - Q13

[ploy_j]

Which is true about the relationship between forward and future prices?

(A) Significant in short term
(B) Futures > Forward if asset is positively correlated with rates
(C) Futures < Forward if asset negatively correlated with rates
(D) Futures less liquid so higher price

David, could you please explain why (C) is not correct? I thought if (B) is correct, (C) should be correct too based on page 19 of Market Risk Notes. Or have I misunderstood something?

Thanks in advance!

 

[David Harper CFA FRM]

FRM wannabe,

My mistake. B & C can't both be true. Apologies. Thank you for alerting me. I just fixed the question to give:

A. Significant in short term
B. Futures > Forward if asset positively correlated with rates
C. Futures < Forward if asset positively correlated with rates
D. Futures less liquid so higher price

David

 

[ploy_j]

Hi David,

You're welcome

Just wondering, what does option (a) actuall mean?

Thank you!

 

[David Harper CFA FRM]

it's a reference to the idea that for short maturities (in the short term), there is no material difference between forward and futures price (same as with the convexity bias in Eurodollar futures vs. forwards: only material for longer terms)...David