A NEW COMPARISON
BETWEEN FUTURE AND
by Gilles Desvilles 1,2
Today it is generally accepted that conditional on certain simplifying as-
sumptions the prices of a future and a forward both bearing on a same asset
are identical when the interest rates are constant, and otherwise differ. Among
the more fundamental simplifying assumptions is the absence of transaction
costs and default risk.
Frequently quoted papers on this matter are the works of Jarrow and Ol -
dfield3, Morgan4 and chiefly Cox, Ingersoll and Ross (CIR)5. Following the three
latters’ article, it has become usual to read in the Finance textbooks that if the
price variations of the future are positively correlated with those of the interest
rates, then the future is more expensive than the forward, and conversely.
The purpose of this article is to review this generally accepted result in the
light of experiment. Part I shows that, with assumptions representative of the
major derivative markets’ reality, future and forward have not the same price.
It concludes that the future dominates the forward: it sells for more and buys
for less than the forward. Part II is a real-time test proving the price domi -
nance of the future in the case of the 3-month Euribor contract.
We are indebted to Reuters Ltd for giving us the means to carry on an ampi -
rical study of that kind, which as far as we know is a unique experiment as of
1 Maître de Conférences at Conservatoire National des Arts et Métiers, Paris, France, and Member of Cereg,
2 An initial version of this article was first presented at Association Française de Finance (Affi) annual Con-
ference in June 1999.
3 ‘‘Forward contracts and futures contracts’’, Robert A. Jarrow and George S. Oldfield, Journal of Financial
Economics, December 1981.
4 ‘‘Forward and futures pricing of treasury bills’’, George E. Morgan, Journal of Banking and Finance, De-
5 ‘‘The relation between forward prices and