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Future prices vs. forward pricesƒ 154

Marking to market creates

interest rate risk

ƒ

F=f if r = constant / deterministic

ƒ

f < F if

ρ

(underlying price, r) < 0

• if underlying inc.

Ä

r dec. and gain; gains are invested at low

rates

• if underlying dec.

Ä

r inc. and loss; losses have to be financed

at high rates

ƒ

f > F if

ρ

(underlying price, r) > 0

• if underlying inc.

Ä

r inc. and gain; gains are invested at high

rates

• if underlying dec.

Ä

r dec. and loss; losses can be financed at

low rates

ƒ

In practice, differences are very small

Ä

forward and futures

prices are usually assumed to be the same

!

Derivative securities: Futures - Pricing