Interest Rate Futures: Eurodollar, SOFR, and the Futures-Forward Difference

Interest rate futures — Eurodollar, SOFR, and Fed Funds futures — are among the most liquid instruments in the world, trading over $1 trillion in notional daily. Unlike a forward rate agreement, a futures contract is settled daily: gains and losses are marked to market and credited/debited in cash each day. This daily resettlement has a subtle but important pricing consequence: the futures price for a rate contract is systematically lower than the corresponding forward price (equivalently, the futures rate is higher than the forward rate). The difference — the futures-forward convexity adjustment — arises because daily settling creates a correlation between daily cash flows and the interest rate, and this correlation has positive value that is priced into the futures contract. This adjustment can reach 30–50 bps for long-dated contracts.