Explanation:
In financial markets, there is a systematic relationship between forward rates and futures rates due to the convexity adjustment effect. The key differences are:
Due to this daily settlement feature of futures contracts, when interest rates are positively correlated with the market:
This creates a convexity bias that makes futures rates typically lower than forward rates. Therefore, the forward rate is normally higher than the futures rate.
Correct Answer: A - The forward rate is normally higher than the futures rate.
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Consider an FRA (forward rate agreement) with the same maturity and compounding frequency as a Eurodollar futures contract. The FRA has labor underlying. Which of the following statements are true about the relationship between the forward rate and the futures rate?
A
The forward rate is normally higher than the futures rate.
B
They have no fixed relationship.
C
The forward rate is normally lower than the futures rate.
D
They should be exactly the same.
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