"You should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio."
Incorrect.
- In a flat (constant) interest rate environment, there is no difference in the prices of futures and forward contracts.
- The part of the comment ralating to credit risk is correct.
- Because the forward contracts are not marked to market each day, the value is not reset to zero each day and credit risk is higher because large losses are allowed to accumulate.
- Thus, the credit risk would increase if forwards were used instead of futures.
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