Explanation:
When there is a negative correlation between the return on assets and interest rates, the forward price is greater than the futures price. This is because futures contracts are marked-to-market daily, and with a negative correlation, the holder of a long futures position tends to be paid (in periods of low returns) when the assets have low returns and the risk-free rate is high, making futures contracts more valuable than forward contracts.
Q.4901 What would you expect when there is a negative correlation between return on assets and interest rates?
A
The forward price is greater than the futures price.
B
The forward price is less than the futures price.
C
The forward price is equal to the futures price.
D
None of the above.
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