**Could someone please explain what these two sentences mean?**

The 3month fwd on 1 year MRR = 5%

Future = 100 - 5 = 95

At expiry

Interest rate moves to 7%

Future = 100 - 7 = 93

The relationship is linear.

At expiry

Interest rate moves to 9%

Future = 100 - 9 = 91

The relationship between interest rates and price of future linear.

Assume Notional principal = $1m

Payoff on forward is different.

At 7%

(MRR diference) x time adjustment x NP / disocunted

(7 -5) x 1 / ( 1.07) = 1.86

At 9%

(MRR diference) x time adjustment x NP / disocunted

(9 -5) x 1 / ( 1.09) = 3.67

Due to discounting element the relatinship between interest rates and forward value is NOT LINEAR it is convex.

Thanks @MikeyF . The examples make it clear. But why does one have discounting whereas the other does not?

Didn’t get you

Sorry.

FRA are OTC no margin, early payment =to reduce credit risk and hence disocunting.

STIR futures with margin and no credit risk. Discounting payoff to reduce credit risk is irrelavant.