The relationship of forwards and futures is best represented by the following statement(s)
A) If futures price movements and interest rate movements are positively correlated, then futures prices will be higher than forward prices.
B) If futures price movements and interest rate movements are negatively correlated, then futures prices will be lower than forward prices.
C) If futures price movements and interest rate movements are uncorrelated, then futures and forward prices will coincide.
D) All of the above.

Question

The relationship of forwards and futures is best represented by the following statement(s) 
A) If futures price movements and interest rate movements are positively correlated, then futures prices will be higher than forward prices.
B) If futures price movements and interest rate movements are negatively correlated, then futures prices will be lower than forward prices.
C) If futures price movements and interest rate movements are uncorrelated, then futures and forward prices will coincide.
D) All of the above.

Quizplus · Accepted Answer

All of the above statements are true. The relationship between forward and futures prices is influenced by interest rate movements. If interest rates and futures prices are positively correlated, this will increase the cost of carry and thus increase futures prices relative to forward prices. If interest rates and futures prices are negatively correlated, this will reduce the cost of carry and thus decrease futures prices relative to forward prices. When interest rates and futures prices move independently, the difference between futures and forward prices will be minimal or non-existent.

The Relationship of Forwards and Futures Is Best Represented by the Following