FICC Related Questions
Forward and Futures
What's the difference between futures and forwards? If the price of the underlying asset is strongly positively correlated with interest rates, and the interest rates are stochastic, which one has higher price: futures or forwards? Why?
Trading Futures are traded in exchange and more standardized; while forward are OTC.
Settlement Futures contracts are marked-to-market daily, forwards are settled at the end of the contract term.
Pricing Since Futures are mark-to-market, if the future prices have positive correlation with interest rates, then long future contracts indicates that daily immediate profits can earn interests also at a higher rate, while saving from borrowing in lower rates when the futures have losses.
Thus, futures contracts can be more valuable than forwards when the value is positively correlated with interest rates.
