Interview Question: Forward Thinking

Sample Question #55 (finance – derivatives pricing)

Are the forward price and futures price on the same underlying asset with the same delivery date equal? How can the two prices differ from each other?

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3 Responses to Interview Question: Forward Thinking

  1. says:

    i’m a chinese student . i want to ask a question, does quant need a phd degree? 

  2. Brett says:

     You don’t need a Ph.D. to be a quant.  You just need to be knowledgeable in quantitative techniques as well as possess programming skills.  The vast majority of quants have at least a master’s degree.

  3. Brett says:

    ANSWER
     
    They are equal only when the interest rate is a known function of time. In particular, if the interest rate is constant, the two assets have the same price.
     
    If the interest rate is unknown, forward and futures prices will be different, because of futures’ "marked to market" feature, which makes the investor’s position sensitive to unpredictable changes in interest rate.
     
    Also, transaction costs and taxes can also make the two instruments’ prices differ from each other. 

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