Since forward pricing formulas are used to evaluate futures, the question arises: are futures and forwards priced the same?
Theoretically, in the long run, it is said that a futures contract should be slightly more attractive than a forward contract with the same terms.
The reasoning goes like this:
If we assume that the underlying asset price is positively correlated with interest rates, then the holder of a long futures contract gains when the asset price rises. These gains can be reinvested at an above-average return. On the other hand, if the underlying asset price falls, the futures holder suffers immediate losses, which can be financed at a below-average interest rate. The same cannot be said about a forward contract, since daily changes in gains and losses have no impact there.
Therefore, when interest rates are positively correlated with the underlying asset price, the price of a long futures contract should be slightly higher than the price of a long forward contract, and vice versa when the correlation is negative.
However, if the maturity of the futures and forward contracts is only a few months, the difference in their prices is theoretically so small that it can safely be ignored. In practice, though, the difference may result from other important factors — taxation mechanisms, differences in liquidity, or default risk.
P.S.
Difference:
| Feature | Futures | Forwards |
|---|---|---|
| Trading Venue | Exchange-traded (standardized contracts) | Over-the-counter (OTC), privately negotiated |
| Contract Terms | Standardized (size, maturity, settlement date) | Customized to parties’ needs |
| Liquidity | Highly liquid due to standardization | Less liquid, depends on counterparty |
| Settlement | Marked to market daily (daily gains/losses settled) | Settlement at maturity (single cash flow at end) |
| Counterparty Risk | Low, exchange clearinghouse guarantees performance | High, depends on counterparty creditworthiness |
| Pricing Impact | Affected by daily margining → convenience of reinvestment or financing | No daily margining, profit/loss realized only at maturity |
| Typical Use | Hedging, speculation, arbitrage with standard contracts | Customized hedging, matching specific exposures |
| Regulation | Heavily regulated by exchanges | Less regulated, private agreements |
Source: Options, Futures & Other Derivatives – John C. Hull