# Futures prices and interest rates

Hey all

If there is a direct relationship with futures prices and interest rates, futures are priced higher than forwards. Isn’t the price of a futures contract set at the beginning of the contract?

Also, I’ve seen explanations of this based on what happens when the *underlying moves. *So, can someone explain this in terms of the futures price moving (not the underlying). If the reasoning is that as the underlying moves up a long futures contract (at expiration) will be more valuable, it still doesn’t make sense with respect to *price*.

My confusion is that since the futures price is set at the outset, why is the price sensitive to interest rates?

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This is due to arbitrage.

If the underlying price of a non-dividend (interest) paying and non-storable asset is S

_{0}= $100, and the annual risk-free rate, r, is 5%, assuming that the one-year futures price is $107, we can show that this situation creates an arbitrage opportunity and the trader can use this to earn risk-free profit. The trader can implement following actions simultaneously:After one year, at maturity, the trader will deliver the underlying earning of $107, will repay the debt and interest of $105 and will net risk-free of $2.

While this is all true – and riviting, of course – it doesn’t address OP’s question.

Simplify the complicated side; don't complify the simplicated side.

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I was going for riviting!