Pricing and Valuation of Forwards vs. Futures

A futures contract’s value needs to take into account the previous day’s settlement, as they are marketed every day. Suppose you have a forward which pays out on expiration day, with a stock worth USD 10. It expires in two days at USD 15. Your friend has a futures contract with the same stock worth USD 10. It will also expire in two days at USD 15, but the day before it expires, it goes down to USD 9.

With your forward, you'll make USD 5 on the expiration day. Do you think your friend with a future will make more or less on expiration day?

No. Since the future pays out every day, it may pay interest, but the forward will pay just on the expiration day.

What do you think would be the difference between a forward and a future if the interest rate were held constant?

No. If interest rates were constant, forwards and futures would be the same.

Right. If interest rates were constant, forwards and futures values could be the same.

But for a forward contract, this difference is set from the start. For a futures contract, the mark to market (MTM) mechanism resets the contract value to zero every day, with the cumulative differences between each prior day's price and the present value of the futures price settled with variation margin. So it's very unlikely that the two contracts would return exactly the same amount, even if many things were held constant.

Right. The futures contract could make a little bit more than the forward since the future pays out every day and may pay interest. The forward will pay just on the expiration day.

In summary: [[summary]]

The forward contract will make more because it's all paid out at once

The futures contract will make the same or a little bit more because it's paid out daily

The future would be worth more

There wouldn't be a difference

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