How Forward and Futures Prices Differ
Summary
The document distinguishes forward prices from futures prices by presenting textbook definitions and a practical explanation. A forward price is the delivery price that makes a forward contract’s value zero when entered. The cited definition of a futures price expresses it as the conditional expected value of the asset at the contract’s settlement date, under the relevant probability framework.
The answer emphasizes the contract structure: forwards are typically negotiated over the counter, while futures are traded on exchanges. For matching maturities, their prices are often close, though the document does not derive the conditions for equality or discuss the effects of daily settlement, interest rates, or other market details. It recommends learning basic contract mechanics alongside mathematical pricing theory; its explanation is introductory rather than a full account of valuation or arbitrage relationships.
Key ideas
- A forward price is the delivery price that gives a newly entered forward contract zero value.
- A futures price is described as a conditional expectation of the underlying asset’s future value.
- Forwards are typically over-the-counter contracts, while futures are exchange-traded.
- Prices for forwards and futures with matching maturities are generally close, but the document gives no detailed conditions for their difference.
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# What do Future price and Forward price represent
# What do Future price and Forward price represent
In Shreve's Finance and Stochastic calculus, definitions are:
> Forward Price: The $T$-forward price $For_S(t,T)$ of this asset at time $t$, where $0\leq t\leq T$, is the value of $K$ that makes the forward contract have no-arbitrage price zero at time $t$. ($K$ is the striking price)
> Futures price: The futures price of an asset whose value at time $T$ is $S(T)$ is \begin{align*} Fut_S(t,T)=E(S(T)|\mathcal{F}(t)) \end{align*}
They seem to be different from the price of an asset derivative, which satisfy the formula: \begin{align*} V(t)= \frac{1}{D(t)}E(D(T)V(T)|\mathcal{F}(t)) \end{align*} where $V(T)$ is the pay-off. (Where $D(t)$ is the discount process)
So my question is: What do these two concepts really mean? Does anyone have any comments?
Thanks in advance!
## Answer by AKdemy (score 1)
https://quant.stackexchange.com/a/66376
Is there any particular reason you are looking at Shreve? Euan Sinclair for example mentions in all his books that "Traders really do not need to know stochastic calculus or to be able to rigorously derive a pricing model." I am not trying to discourage you from looking at stochastic calculus. However, I think getting the basics in finance right is more important than anything else.
Forwards are agreements to buy/sell an asset at a certain time in the future for a certain price. Main difference to futures is that forwards are OTC, and futures exchange traded. As long as the maturities are the same, forward and future prices will be very close. You can find a very basic and good introduction in Hull.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.