Futures

The exam loves to make you sign that price gap by the correlation: when futures prices are positively correlated with interest rates, daily gains are reinvested at higher rates and losses funded at lower rates, so longs prefer futures and the futures price ends up higher than the otherwise-identical forward price; negative correlation flips it (forward priced higher); zero correlation makes them equal. Note the curriculum frames this as a price difference, not a value one. A second pattern asks who bears default risk: the clearinghouse acts as central counterparty, novating the trade so neither original party faces the other.

The classic trap is conflating price with value: a futures position’s value is reset to zero at each daily settlement, whereas a forward’s value accumulates between settlements until expiration. Students also wrongly treat margin as a down payment — it is a refundable performance bond, not borrowed money (see margin and forward). Don’t assume futures always command a higher price than forwards; that holds only under positive rate correlation.