Answer: positive correlation between the futures price and interest rates.

## Explanation When there is a **positive correlation** between futures prices and interest rates, the price of a futures contract will be higher than the price of a forward contract on the same asset with the same expiration date for an investor with a long position. ### Key Concepts: 1. **Marking to Market**: Futures contracts are marked to market daily, while forward contracts settle only at expiration. 2. **Correlation Effect**: When futures prices and interest rates are positively correlated: - When futures prices rise (favorable for long position), interest rates also rise - The long position receives daily gains that can be reinvested at higher interest rates - When futures prices fall (unfavorable for long position), interest rates also fall - The long position pays daily losses that can be financed at lower interest rates 3. **Net Benefit**: This creates a net benefit for the long futures position compared to a forward position, making futures more valuable. 4. **Pricing Relationship**: Due to this advantage, futures prices will be higher than forward prices when there is positive correlation between futures prices and interest rates. ### Mathematical Basis: The futures price (F) and forward price (F*) relationship can be expressed as: F > F* when correlation(futures price, interest rates) > 0 F = F* when correlation(futures price, interest rates) = 0 F < F* when correlation(futures price, interest rates) < 0 This is because the daily settlement feature of futures creates an advantage when price movements and interest rate movements are positively correlated.

Author: LeetQuiz .