Reading 53: pricing and valuation of futures contracts

Question 1

For a forward contract on an asset that has no costs or benefits from holding it to have zero value at initiation, the arbitrage-free forward price must equal:
the expected future spot price.
the future value of the current spot price.
the present value of the expected future spot price.

Answer 1

For an asset with no holding costs or benefits, the forward price must equal the future value of the current spot price, compounded at the risk-free rate over the term of the forward contract, for the contract to have a value of zero at initiation. Otherwise an arbitrage opportunity would exist. (LOS 53.a)

Question 2

For a futures contract to be more attractive than an otherwise equivalent forward contract, interest rates must be:
uncorrelated with futures prices.
positively correlated with futures prices.
negatively correlated with futures prices.

Answer 2

If interest rates are positively correlated with futures prices, interest earned on cash from daily settlement gains on futures contracts will be greater than the opportunity cost of interest on daily settlement losses, and a futures contract is more attractive than an otherwise equivalent forward contract that does not feature daily settlement. (LOS 53.b)