Forward Prices and Futures Prices

Abstract

This article provides an overview on the literature (mainly theoretical) about forward prices and futures prices on the same underlying security with the same expiration. The well-known fundamental relationship between the two prices is derived. In particular, forward prices are expressed in terms of futures prices by means of a convexity drift adjustment that takes into account the instantaneous correlation between those futures prices and discount bonds, driven by two imperfectly correlated Brownian motions. The derivation of the drift adjustment is original.