ABSTRACT
This chapter shows that the differences between forward and futures contracts are solely due to the differences in the timing of the cash flows from the two contracts. The futures contracts analyzed are simplified versions of the exchange-traded futures contracts. The chapter demonstrates through an example that when interest rates are random, futures prices are less than forward prices. This is due to the negative correlation between interest rates and futures prices on zero-coupon bonds. The chapter analyzes the arbitrage-free valuation of options on futures. Exchange-traded Treasury futures contracts have various imbedded options related to the delivery procedure. These imbedded options, known as the delivery option, the wildcard option, and the quality option, can significantly influence the futures price.
