Future prices vs forward prices investment, direction, valuation, question, forward

stockjaguar

Got a question on the logic of this problem.

Part of Givens in the Problem (rest of the info given is irrelevant to the question)

1) Mazakhastan's investors use mark-to-market valuation system.
2) S&P just raised Mazakhastan's sovereign debt to investment grade.
3) Interest rates tend to move in the same direction as asset values
4) New tech innovations and commerical expansion has substantially boosted the income of the avg Mazakhastanian.


QUESTION:
Based on the info above, Mason can best conclude that
a) futures prices are higher than forward prices in Mazakhastan
b) inflation in Mazakhastan is likely to rise
c) prices of corp bond in Mazakhastan are likely to rise.

Answer: A.
Since Mazakhastanian investors prefer mark-to-market accounting and interest rates are positively correlated to asset values, Mason can conclude that futures prices are higher than forward prices.

Can anyone explain to logic to this answer? Thanks

ryanlb

futures differ from forwards in that there is a mark-to-market cash flow each day.

Because of the positive correlation to asset prices , investors see positive cash flow in their margin accounts , which they can invest profitably elsewhere .

So Futures attract a premium over forwards , where cash flow takes place only at expiry

scarecrow

since interest rates move in the same direction as the asset values, investors will prefer the mark to market which happens in a futures contract. hence futures will be costlier than forwards.

Sportsman

aahhh~~~ thats right.. the positive correlation of asset price and interest rate changes... thanks!