Why are Futures Prices and Forward Prices Different

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Video explaining why futures prices are different from forward prices even if the underlying assets and terms of both are the same.

The difference between the two is that the forward contract is traded on an OTC market where the primary risk is counterparty risk of default.  Conversely, in a futures contract, the primary risk is basis risk and not counterparty risk.  Futures contracts trade on an exchange which is basically the other side of the trade, rather than another counterparty. 

The prices in these contracts differ due to daily settlement.  For those who are long a futures contract, there will be daily settlement of gains, or losses, on a nightly basis.  That means that if the spot price of the underlying goes up, the account will have excess margin, thereby allowing the investor to reinvest at a higher rate.  Forward contracts do not have this call and would render them less valuable.  Conversely, if the spot price falls, there will be a margin call which will require the futures trader to inject additional cash into the account using borrowed money, thereby rendering the forward contract more valuable.

Tim Ord
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Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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