Book 4_Derav_READING 73_PRICING-AND-VALUATION-OF-FUTURES-CONTRACTS

Question 1

For a forward contract on which no mark-to-market gains or losses are paid

Answer 1

The forward price is constant over its life, but the contract’s value will fluctuate with changes in the value of the underlying

Question 2

For a futures contract

Answer 2

• The price and value both change when daily mark-to-market gains and losses are settled.
• The change in the futures price to the settlement price each day returns its value to zero.

Question 3

interest rate futures are quoted

Answer 3

• on a price basis:
  futures price = 100 - (100 × MRRA, B–A)

Question 4

The basis point value (BPV)

Answer 4

BPV = notional principal × period × 0.01%

Question 5

if interest rates are correlated with futures prices.

Answer 5

prices of forwards and futures that have the same terms may be different

Question 6

If interest rates are constant or uncorrelated with futures prices

Answer 6

the prices of futures and forwards are the same

Question 7

interest rates and futures prices correlation

Answer 7

• Positive: Futures are more valuable than forwards
• Negative: Futures are less valuable than forwards

Question 8

Convexity bias

Answer 8

can result in price differences between interest rate futures contracts and otherwise equivalent forward rate agreements