Abstract
Futures contracts are very similar to forward contracts. Both are agreements to trade an asset at a specific time in the future for a predetermined price. However, they are different in two aspects. First, the requirement of marking-to-market of futures contracts results in the difference in the timing and the size of cash flows between futures and forward contracts. Daily settlement of gains and losses is made by futures traders, but forward traders make no settlement until a reverse position is taken or a delivery is made. When interest rates are stochastic,the marking-to-market requirement results in differential pricing of futures and forward contracts. Second, the differential microstructure between futures and cash markets (see Kane 1980) also results in divergence between futures and forward prices. T-Bill futures and forward price differentials have been documented in a number of studies. Capozza and Cornell (1979) compared futures rates on T-Bills with forward rates contained in the term structure of interest rates. Their empirical results showed the existence of a differential that increased monotonically with the time to maturity of futures contracts. Elton, Gruber, and Rentzler (1984) used intraday prices and complex trading strategies in the test of efficiency of T-Bill futures markets. Their results indicated that the T-Bill futures markets were not efficient. Kawaller and Koch (1984) and Vignola and Dale (1980) both found significant futures and forward rate differentials on T-Bills when forward rates were implied by a Treasury yield curve. However, the differential became much smaller when forward rates were implied by the cash-and-carry trading relationship between the cash and the futures markets.
Published Version
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