“From a technical standpoint, the differences between theoretical (no-arbitrage) prices of futures and forwards center on the correlation between interest rates and the mark-to-market cash flows of futures:
higher reinvestment rates for gains and lower borrowing costs to fund losses lead to a preference for the mark-to-market feature of futures, and higher prices for futures than forwards, when interest rates and asset values are positively correlated.
the value of your future changes from day to day, but are you reinvesting your future everyday? Why do the reinvestment rates matter? Thanks.
Reinvestment rates do matter in the choice between futures and forwards.
When there is a positive correlation between interest rates and the underlying asset price, gains from increases in the asset price (the excess balance on the margin account) can be reinvested at a higher rate (positive correlation: asset price rose, so interest rates rose as well). In this case the investor will have a preference for futures as opposed to forwards.
When there is a positive correlation between interest rates and the underlying asset price, gains from increases in the asset price (the excess balance on the margin account) can only be reinvested at a lower rate (negativecorrelation: asset price rose, so interest rates fell). In this case the investor will have a preference for forwards as opposed to futures.
This explains price differences between forwards and futures prior to expiration.
Reinvestment rates matter on futures because they are marked to market daily; this results in an increase or decrease in your margin account which earn interest.
If your margin account increases when interest rates increase, that’s good (you gain more high interest), and if your margin account decreases when interest rates fall, that’s (relatively) good (you only lose low interest).
If your margin account increases when interest rates fall, that’s (relatively) bad (you gain only low interest) and if your margin account decreases when interest rates rise, that’s bad (you lose high interest).
None of this applies to forwards because they’re not marked to market, and you don’t have a margin account.