Explanation:
When futures prices are positively correlated with interest rates, futures contracts are less desirable to long position holders than forward contracts.
Why?
Although this seems favorable, the key CFA insight is that forward contracts delay all cash flows until maturity, eliminating reinvestment and borrowing risk.
Because futures force early cash flows whose value depends on interest rates, this timing risk slightly disadvantages the long position relative to a forward.
Exam tip:
Positive correlation → futures less attractive to the long
Negative correlation → futures more attractive to the long
Ultimate access to all questions.
If futures prices are positively correlated with interest rates then futures contracts are mostly likely.
A
less desirable to holders of long positions than are forwards.
B
more desirable to holders of long positions than are forwards.
C
neither more or less desirable to holders of long positions than are forwards.