FRM: Why a futures price differs from a forward price

Why would the prices differ? The key difference is the daily settlement of the futures contract. The investor in a futures contract must maintain a margin account. The key issue is the correlation between the spot price and the interest rate. If the correlation (spot, interest rate) is strongly positive, an increase in the spot implies an increase in the forward/futures value (recall delta equals approximately 1.0 for both). But only the futures contract is settled daily. In this case, an increase in value implies excess margin; the excess margin can be withdrawn from the margin account and (owing to the positive correlation) invested at a higher interest rate.

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