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Futures and Forward Prices with Markovian Interest Rate Processes

Simon Benninga and Aris Protopapadakis

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: We derive a closed-form expression for the differences between forward and futures prices in the framework of a Lucas (1978) equilibrium model. We calculate this difference for fixed-income securities in two ways: 1. Using historic interest rate data to calibrate the matrix of nominal state price, and 2. By testing a large sample of randomly-generated state price matrices. In both cases we find few meaningful differences between futures and forward prices. Larger differences are generated for highly diagonal state price matrices. We conclude that in most economically relevant circumstances the costs of marking to market for fixed income securities are negligible.

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