If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

Question

Quizplus · Accepted Answer

Rational investors would arbitrage the difference by selling futures contracts (which are priced higher) and buying equivalent forward contracts (which are priced lower), leading to increased demand for forwards (pushing their prices up) and increased supply of futures (pushing their prices down) until the prices converge.

If the Futures Rate Is Above the Forward Rate, Actions