It is known that KTB futures contracts are significantly underpriced when the model price is calculated using the ad hoc cost-of-carry model employed in industry. This paper examines whether this underpricing phenomenon is caused by using the wrong model to price the futures contracts. This paper documents that the difference between the model price and the market price of KTB futures decreases substantially if the correct term-structure-based model is used to estimate the model price of KTB futures. In addition, even though the underpricing phenomenon can be exploited to generate some trading profits, the profits cannot be regarded as arbitrage profits. Thus, we believe that the underpricing phenomenon is illusory, and that much of it can be attributed to the wrong model being used in the industry. ？ 2006 Elsevier B.V. All rights reserved.