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The financial industry tends to treat forward prices and futures prices as being equivalent as we...

The financial industry tends to treat forward prices and futures prices as being equivalent as we did in class. While this is virtually true, there may be some differences due to marking to market. Justify the following statements: (1) “If the correlation between the spot price and interest rates is strongly positive, then the futures price is larger than the forward price”. However, (2) “if the correlation between the spot price and interest rates is strongly negative, then the futures price is smaller than the forward price”.

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Answer #1

1) This statement is true.

It means future price is higher than forward price.

If correlation between spot price and interest rate is strongly positive  , then it will lead to attractive future buyer ( as demand increases). This leads to higher  future price , compared to forward price  

2) This statement is true.

It means forward price are higher than future price

If correlation between spot price and interest rate is strongly negative , then it will lead to unattractive future buyer. This leads to lower future price , compared to forward price on an otherwise identical contract

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