I’ve found a lot of threads from the CFA lvl 2 exam on this, but I’m sure you need to know this on a much less detailed basis for the level1 exam. Does anyone know what we need to specifically know for level 1 in regards to why futures and forwards differ in price?
Thanks for the help (my apologies for starting so many threads, want to get all of the miscallaneous questions i’ve written down while studying for these past few months out of the way)
Does anyone know what we will specifically need to know in two days??? The answer is no.
The concepts mentioned in the text are very high level. Here is a summary of the concepts I think we should know/understand for Saturday:
Futures and forwards will have the same price when interest rates are uncorrelated with the underlying asset.
Futures prices will be higher than forward prices when interest rates are positively correlated with the underlying asset. The logic is that since you have to deposit margin for a futures position then when interest rates go up (and thus your collateral yield will increase) and the underlying asset goes up (and so does a long position in the future) then you will be earning more on your collateral because you will now have “excess margin.” Thus it is more valuable to have a futures position than a forward.
The inverse is true when interest rates are negatively correlated with the underlying asset prices. Futures prices will be lower than forward prices when interest rates are negatively correlated with the underlying asset. The logic is the inverse of what was mentioned in #2.
Hope this helps. I think the main thing is just knowing at a high level that when interest rates are positively or negatively correlated then futures and forward prices will differ.