21.   Therefore we would expect a forward contract and a financial futures contract with the same specifications to have the same price.

22.   We shall therefore concentrate on the pricing of financial futures contracts.

23.   If there is no uncertainty, the fair price of a financial futures contract can be determined very simply using the cost-of-carry model.

24.   If futures contracts were fairly priced, however, this could not happen.

25.   And because the basis tends to zero as the delivery date of the futures contract approaches, it also requires the futures price to increase over time.

26.   We are now in a position to find the fair price of the futures contracts trading on LIFFE.

27.   The fair price of the stock index futures contract can be calculated in precisely the same way as with the other contracts.

28.   The set of actively traded futures contracts is very limited in comparison to the almost infinite variety of forward contracts that are struck.

29.   However, the bank can also use an exchange traded futures contract to further reduce its risk in taking on the forward contract.

30.   It could do so if price fluctuations in the asset underlying the futures contract are highly correlated with the risky prospect that is the subject of the forward contract.