{"id":1478,"date":"2020-04-14T17:33:00","date_gmt":"2020-04-14T17:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1478"},"modified":"2026-03-23T08:12:05","modified_gmt":"2026-03-23T08:12:05","slug":"why-forward-futures-prices-differ","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/derivatives\/why-forward-futures-prices-differ\/","title":{"rendered":"Why Forward and Futures Prices Differ"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n\n  \"name\": \"Basics of Derivative Pricing and Valuation (2025 Level I CFA\u00ae Exam \u2013 Derivative \u2013 Module 2)\",\n\n  \"description\": \"This video lesson covers the basics of derivative pricing and valuation, including arbitrage, replication, and risk neutrality; the value and price of forward and futures contracts; forward rate agreements; the differences between forwards and futures; swaps as a series of forward contracts; and the valuation of options using key concepts like put\u2013call parity and binomial models.\",\n\n  \"uploadDate\": \"2022-06-29T00:00:00+00:00\",\n\n  \"thumbnailUrl\": \"https:\/\/analystprep.com\/path-to-thumbnail\/derivative-pricing-thumbnail.jpg\",\n\n  \"contentUrl\": \"https:\/\/youtu.be\/0Geaej45v7w\",\n\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/0Geaej45v7w\",\n\n  \"duration\": \"PT1H8M27S\",\n\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/analystprep.com\/path-to-logo\/logo.jpg\",\n      \"width\": 600,\n      \"height\": 60\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following best describes why futures and forward prices differ?\",\n    \"text\": \"Which of the following best describes why futures and forward prices differ?\\n\\nA. The forward contract has essentially no counterparty risk since it is a private agreement between two parties, which is why forward contracts are more expensive.\\nB. Futures contracts, since traded on an exchange, have more liquidity, hence why it is cheaper to invest in a futures contract.\\nC. Futures contracts settle daily, which means investors in futures contracts must hold a margin account.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"C. Futures contracts settle daily, requiring margin accounts. Daily settlement allows gains to be reinvested sooner, which can cause futures prices to differ from forward prices.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/0Geaej45v7w?rel=0&#038;modestbranding=1&#038;playsinline=1&#038;vq=hd1080\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  allowfullscreen>\n<\/iframe>\n\n\n<p>Forward and futures contracts share several similar features; however, how they are traded and the resulting cash flows mean forward, and futures contracts with the same underlying asset may trade at a different price.<\/p>\n<h2><strong>Exchange-traded vs. OTC<\/strong><\/h2>\n<p>One of the main differences between the two is that the forward contract is an over-the-counter agreement between two parties, i.e., a private transaction. On the other hand, futures contracts trade on a highly regulated exchange, according to standardized features and terms of the contract.<\/p>\n<div style=\"text-align: center; margin: 25px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 10px 18px; border: 2px solid #1a73e8; border-radius: 999px; color: #1a73e8; text-decoration: none; font-weight: 500; background-color: #f5f9ff; white-space: nowrap;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Understand OTC counterparty risk and differences between forwards and futures <\/a><\/div>\n<h3>Risk Associated with Trading OTC<\/h3>\n<p>The primary risk for these two derivatives is different because of how they trade. The principal risk is counterparty risk for the forward contract, which is the risk that one party will default on the agreement. With a forward contract, the mark-to-market and determination and payment of the net gain occur at contract expiration. In a high-interest rate environment, the time value of money component to the end-of-contract cash flow can be material.<\/p>\n<h3>Exchange-traded Futures Contracts<\/h3>\n<p>Futures contracts are traded on an exchange, and the exchange acts as the counterparty in the agreement, so there is little to no worry about default risk. Futures contracts also have daily settlements through the daily mark-to-market process. Each day, the parties to the transaction must maintain their margin accounts. This daily cash flow means there isn&#8217;t a &#8220;lump sum&#8221; to exchange at contract expiration. This differing cash flow pattern can produce a pricing difference relative to an equivalent forward contract.<\/p>\n<h2>Pricing Differential<\/h2>\n<p>If interest rates were constant, futures and forwards would have the same prices. The pricing differential between the two varies with the volatility of interest rates. Practically, the derivatives industry makes virtually no distinction between futures and forward prices.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following <em>best<\/em> describes why future and forward prices differ?<\/p>\n<p>A. The forward contract has essentially no counterparty risk since it is a private agreement between two parties, which is why forward contracts are more expensive<\/p>\n<p>B. Futures contracts, since traded on an exchange, have more liquidity, hence why it is cheaper to invest in a futures contract<\/p>\n<p>C. Futures contracts settle daily, which means investors in futures contract must hold a margin account<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p>Futures contracts settle daily which requires the investor to have a margin account. Since futures settle daily, any increase in value will lead to an increase in the excess margin which can then be reinvested.<\/p>\n<\/blockquote>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 20px; border-radius: 999px; background-color: #1a73e8; color: #ffffff; text-decoration: none; font-weight: 600;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"font-size: 15px; margin-top: 12px; color: #555;\">Learn how OTC forward contracts expose investors to counterparty risk, how futures reduce this risk through clearinghouses and daily settlement, and how these differences are tested in CFA Level I derivatives.<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Forward and futures contracts share several similar features; however, how they are traded and the resulting cash flows mean forward, and futures contracts with the same underlying asset may trade at a different price. Exchange-traded vs. OTC One of the&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[10],"tags":[],"class_list":["post-1478","post","type-post","status-publish","format-standard","hentry","category-derivatives","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Why Forward vs Futures Prices Differ | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Forward contracts are OTC agreements, while futures trade on exchanges, explaining their pricing differences and cash flow structures.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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