The forward price is not a forecast
The most common misconception, and a frequent interview probe.
The forward price is set by no-arbitrage, not by anyone's expectation. To sell forward, a dealer can buy the asset today, finance it, and hold it to delivery. That replication fixes the price:
F = S e^((r - q + u)T)
where r is the interest rate, q is income from holding the asset (dividends, yield) and u is storage cost.
If the forward traded above that, you would buy spot, borrow to fund it, sell forward, and lock in a profit.
Cost of carry
The exponent is the cost of carry: what it costs to hold the asset until delivery.
- Interest - you fund the purchase, so it pushes the forward up.
- Income - dividends or yield accrue to the holder, pushing the forward down.
- Storage - physical commodities cost money to hold, pushing it up.
For a dividend-paying index with dividend yield above the interest rate, the forward trades below spot, which surprises people who assume forwards are always higher.
Contango and backwardation
Contango: forward above spot. Backwardation: forward below spot.
Neither is a directional signal in itself - both are usually explained by carry. In commodities, backwardation often reflects a convenience yield: a benefit to holding the physical asset now, which behaves like negative storage cost.
Futures versus forwards
Economically similar, mechanically different in one important way: futures are margined daily, so gains and losses settle continuously rather than at maturity.
Consequences:
- Almost no counterparty credit risk on a future.
- A small pricing difference when interest rates are correlated with the asset price, because the timing of cash flows matters.
- Cash-flow management is a live operational concern for futures - you can be right and still face margin calls.
For interview purposes, "essentially the same price, but futures settle daily so there is a convexity adjustment when rates and price are correlated" is a complete answer.
Practise in finance and derivatives.