Reading 71: Pricing and Valuation of Futures Contracts

Book 3: Fixed Income

With a forward, what changes—the price or the value?

the value changes

the value of the underlying will change

In a futures contract, what changes—the price or the value?

both

Basis Point Value (BPV)

notional value x period x 0.01%

What is the biggest difference between forward and futures prices?

with forwards, mark-to-market gains and losses are paid and will affect price and value

Which provides funds in response to fluctuations in value—forwards or futures?

futures

When are forwards and futures prices exactly the same?

when interest rates are constant or uncorrelated to forward price

What does a positive correlation between interest rates and futures prices mean?

high rates = high futures prices

What does a negative correlation between interest rates and futures prices mean?

high rates = low futures prices

Are differences between forward and futures prices seen in practice?

no

Convexity Bias

the convexity of forwards

Which increases the magnitude of a forward’s value more—an increase or decrease in rates?

a decrease in rates

convexity