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Answer: The forward rate is normally higher than the futures rate.
## 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: - **Forward rates** (from FRAs) are not marked-to-market daily - **Futures rates** (from Eurodollar futures) are marked-to-market daily, creating daily cash flows Due to this daily settlement feature of futures contracts, when interest rates are positively correlated with the market: - Long futures positions benefit from falling rates (receive cash when rates fall) - Short futures positions benefit from rising rates (receive cash when rates rise) 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.
Author: LeetQuiz .
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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