AdvancedMultiple choice
Futures are not forwards · Part 3 of 3
A forward contract and a futures contract on the same asset have the same delivery date. The futures is marked to market every day with cash variation margin; the forward settles once, at delivery.
Now the contract is a short-term interest rate future quoted as 100 minus the rate. How does the rate implied by the futures price compare with the forward rate for the same period?
- AAbove it: subtract a convexity adjustment
- BIt is below the forward rate, so the adjustment is added to the futures rate
- CIt equals the forward rate, since both are set by the same discount curve
- DIt differs only by a credit spread reflecting the exchange’s default risk
The worked solution is in Premium
The answer, the full working and the one idea to take away – for this and all 1,322 questions in the bank. Answer it in practice and your working is marked, with a known mistake named when you make one.
Learn the method
More time value, rates and linear products questions
- What happens to the basis – spot minus futures – as a futures contract approaches expiry?Foundation
- A forward on a stock that pays a dividend, part 1 of 3Foundation
- An index is at 4,000, rates are 5% and the dividend yield is 2%, both…Applied
- A commodity futures curve slopes upward.Applied
- A stock is at $100 and pays a $3 dividend in six months.Applied
- Spot is 1.10 dollars per euro, the one-year dollar rate is 5% and the euro rate is 3%.Applied