Question

Gina Molani CFA wants to establish a long derivatives position in a commodity that she will need to acquire in six months. She observes that the six-month forward price is $45.20, while the six-month futures price is $45.10. This difference most likely suggests:

	A.	long investors should prefer futures contracts to forward contracts.
	B.	there is an arbitrage opportunity.
	C.	futures prices are negatively correlated with interest rates.

Answer 1

This difference most likely suggests futures prices are negatively correlated with interest rates.

.

Reason:

If interest rates were constant, futures and forwards would have the same prices. The pricing differential between the two varies with the volatility of interest rates.

.

So the answer is Option-C: futures prices are negatively correlated with interest rates.