Does a forward contract on a stock index have the same delta as the corresponding futures contra

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Does a forward contract on a stock index have the same delta...

Key Concepts

Delta

Delta is a measure of the sensitivity of a derivative’s price to small changes in the price of the underlying asset. It quantifies how much the price of a forward or futures contract will change in response to a one-unit change in the underlying asset, serving as an important risk management tool in hedging strategies.

Convexity Adjustment

The convexity adjustment refers to the modification needed when comparing futures to forwards because of the daily settlement process inherent in futures contracts. This mark-to-market feature introduces an adjustment in the sensitivity (delta) as it alters the way the contract’s price reacts to changes in the underlying asset, particularly when there is a correlation between the asset prices and interest rates. As a result, even if both derivatives are tied to the same asset, their effective deltas can differ due to this convexity effect.

Forward Contract

A forward contract is a customized agreement between two parties to buy or sell an asset at a predetermined price on a future date. It is settled at maturity with no interim cash flows or mark-to-market adjustments, meaning its payoff is dependent solely on the difference between the agreed price and the spot price at expiration.

Futures Contract

A futures contract is a standardized financial instrument traded on an exchange that obligates the buyer or seller to transact an asset at a set price on a specific future date. Unlike forwards, futures are marked to market daily, meaning gains and losses are realized continuously and require the maintenance of margin accounts, which affects the dynamics of how the contract reacts to changes in the underlying asset.

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