How do you calculate the price of a futures contract?
The notional value of a futures contract is simply the spot price of the asset multiplied by the amount of the asset specified in the contract. The futures value is the current futures price multiplied by the contract size.
Futures Price = Spot Price + (Carry Cost – Carry Return)
This could include storage cost, in case of commodities, interest paid to acquire and hold the asset, financing costs etc. Carry Return refers to any income derived from the asset while holding it like dividends, bonuses etc.
A futures price is determined by the cost of its underlying asset and moves in sync with it. The cost of futures will rise if the cost of its underlying increases and will fall as it falls. But it is not always equal to the value of its underlying asset. They can be traded at different prices in the market.
'fV = PV(1 + R)', where R is the risk-free rate of return.
The price of bond futures can be calculated on the expiry date as: Price = (bond futures price x conversion factor) + accrued interest.
The futures price, f0(T), equals the spot price compounded at the risk-free rate as in the case of a forward contract. The primary difference between forward and futures valuation is the daily settlement of futures gains and losses via a margin account.
The futures price of a commodity is set in advance between producer and buyer. The spot price is the commodity's value when it is ready for delivery. The difference in the two values is where arbitrage traders make their money.
This situation is called backwardation. For example, when futures contracts have lower prices than the spot price, traders will sell short the asset at its spot price and buy the futures contracts for a profit. This drives the expected spot price lower over time until it eventually converges with the futures price.
There is no mathematical formula for expected spot price. It is more of an economic concept rather than a mathematical part. At any point in time, forces of demand and supply play an essential role in determining the market price. For accounting purposes, this will be reasonably uniform worldwide.
The formula is: MTM Value = Number of Units × Current Market Price or Fair Value per Unit. 3. How can you define “mark to market” in futures contract? In futures trading, marking to market (MTM) is the daily valuation of open futures contracts to reflect their current market value.
How do you calculate bond price and yield?
Also referred to as a bond's coupon rate, the nominal yield is the annual income divided by the bond's face value. For example, a bond with a $1,000 face value that pays $50 annually has a nominal yield of 5% (50 Ă· 1,000 = 0.05). For fixed-rate bonds, the nominal yield always remains consistent.
10 Year U.S. Treasury Notes (ZN) Latest Futures Prices, Charts & News | Nasdaq.
The term cheapest to deliver (CTD) refers to the cheapest security delivered in a futures contract to a long position to satisfy the contract specifications. It is relevant only for contracts that allow a variety of slightly different securities to be delivered.
An asset can have different spot and futures prices. For example, gold may have a spot price of $1,000 while its futures price may be $1,300. Similarly, the price for securities may trade in different ranges in the stock market and the futures market.
Generally, contango causes investors to believe that prices are going to continue rising. It indicates that demand is higher than supply in the short term, causing futures prices to rise. Futures prices rise above spot prices because investors become comfortable paying more for the future assets.
The value of a forward contract at date t, is the change in its price, discounted by the time remaining to the settlement date. Futures contracts are marked to market. The value of a futures contract after being marked to market is zero. If interest rates are certain, forward prices equal futures prices.
Spot trading is simple, low-risk, and ideal for short-term traders. Futures trading is more complex, higher-risk, and suitable for long-term traders and those who want to hedge their positions. Traders should consider their goals, risk tolerance, and time horizon before making a choice.
Neither market inherently offers more profitability than the other. However, here are some factors to consider: Trading Capital: Spot trading, especially with high leverage, might require less initial capital than futures trading. This makes it accessible to retail traders.
The term originated in 19th century England and is believed to be a corruption of "continuation", "continue" or "contingent". In the past on the London Stock Exchange, contango was a fee paid by a buyer to a seller when the buyer wished to defer settlement of the trade they had agreed.
The 80% Rule is a Market Profile concept and strategy. If the market opens (or moves outside of the value area ) and then moves back into the value area for two consecutive 30-min-bars, then the 80% rule states that there is a high probability of completely filling the value area.
What is the profit margin on futures?
Futures margin generally represents a smaller percentage of the notional value of the contract, typically 3-12% per futures contract as opposed to up to 50% of the face value of securities purchased on margin.
The price of a bond is determined by discounting the expected cash flows to the present using a discount rate. The three primary influences on bond pricing on the open market are supply and demand, term to maturity, and credit quality.
Yield is a general term that relates to the return on the capital you invest in a bond. Price and yield are inversely related: As the price of a bond goes up, its yield goes down, and vice versa.
You can follow these steps to calculate yield: Determine the market value or initial investment of the stock or bond. Determine the income generated from the investment. Divide the market value by the income.
Futures are valued to eliminate arbitrage so that neither buyer nor seller can be certain of a riskless profit. We learned that this is achieved when: Futures price = (Spot price * (1 + r)^t) + (net cost of carry)
References
- https://diversegy.com/energy-brokers-vs-energy-traders/
- https://www.whistleblower.gov/aboutcftc
- https://www.investopedia.com/ask/answers/112614/what-determines-price-bond-open-market.asp
- https://analystprep.com/cfa-level-1-exam/derivatives/value-and-price-of-futures-contracts/
- https://en.wikipedia.org/wiki/Contango
- https://coinswitch.co/switch/crypto/spot-trading-vs-futures-trading-in-crypto-how-are-they-different/
- https://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm
- https://www.angelone.in/knowledge-center/derivatives/futures-pricing-formula
- https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/forward-futures-contracts/v/interpretting-futures-fair-value-in-the-premarket
- https://www.ziprecruiter.com/Salaries/Futures-Trader-Salary
- https://www.finra.org/investors/insights/bond-yield-return
- https://learn.pjm.com/who-is-pjm/how-does-pjm-make-money.aspx
- https://quizlet.com/215101941/series-3-futures-trading-theory-and-basic-functions-terminology-flash-cards/
- https://www.angelone.in/knowledge-center/futures-and-options/futures-trading
- https://faculty.weatherhead.case.edu/ritchken/textbook/chapter2ps.pdf
- https://www.smallcase.com/learn/mtm-mark-to-market/
- https://www.fia.org/sites/default/files/2022-07/FIA_WP_Clearing%20Firm%20Role_0.pdf
- https://blog.hdata.us/how-do-utilities-make-money-electric-gas-1
- https://www.5paisa.com/stock-market-guide/derivatives-trading/about-futures-contract
- https://www.elearnmarkets.com/school/units/derivatives-demystified/pricing-of-futures
- https://www.cmegroup.com/education/courses/introduction-to-futures/margin-know-what-is-needed.html
- https://www.investopedia.com/terms/c/cheapesttodeliver.asp
- https://www.linkedin.com/pulse/advantages-wholesale-adeena-khan
- https://www.schwab.com/futures/what-are-futures
- https://www.linkedin.com/pulse/trading-currency-spot-vs-futures-which-more-lucrative-cmsprime
- https://www.indiainfoline.com/knowledge-center/derivatives/what-are-the-risks-of-futures-contract
- https://www.ziprecruiter.com/Salaries/Futures-Broker-Salary
- https://faculty.weatherhead.case.edu/ritchken/textbook/Powerpoint/Notes2.PDF
- https://study.com/academy/lesson/valuation-of-futures-contracts.html
- https://en.wikipedia.org/wiki/Spot_market
- https://www.investopedia.com/ask/answers/08/minimum-amounts-of-money-to-start-trading.asp
- https://www.schwab.com/learn/story/7-tips-every-futures-trader-should-know
- https://www.investopedia.com/articles/active-trading/043015/how-why-interest-rates-affect-futures.asp
- https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/pricing-valuation-futures-contracts
- https://www.mypivots.com/dictionary/definition/25/80-rule
- https://www.rff.org/publications/explainers/us-electricity-markets-101/
- https://www.investopedia.com/terms/b/bondfutures.asp
- https://www.linkedin.com/advice/0/what-some-advantages-disadvantages-trading-futures
- https://www.investopedia.com/terms/b/backwardation.asp
- https://energyknowledgebase.com/topics/bilateral-electric-contract.asp
- https://www.greenandprosperous.com/blog/what-is-the-difference-between-wholesale-and-retail-energy
- https://learn.pjm.com/electricity-basics/market-for-electricity.aspx
- https://www.investopedia.com/terms/s/spotprice.asp
- https://www.schwab.com/learn/story/understanding-bond-yield-measurements
- https://www.nasdaq.com/articles/want-to-be-a-stock-market-millionaire-heres-how-much-to-invest-each-month.
- https://www.investopedia.com/terms/c/contango.asp
- https://www.nasdaq.com/market-activity/futures/zn
- https://diversegy.com/energy-brokers/wholesale-electricity-market-explained/
- https://www.shopify.com/enterprise/direct-to-consumer-vs-wholesale
- https://www.indeed.com/career-advice/career-development/what-is-yield
- https://www.thebalancemoney.com/should-you-trade-futures-contracts-or-options-809157
- https://www.tokenmetrics.com/blog/spot-trading
- https://www.ea.govt.nz/industry/wholesale/spot-market/
- http://konvexity.com/difference-between-forward-and-futures-prices
- https://www.cmegroup.com/education/courses/introduction-to-ferrous-metals/what-is-contango-and-backwardation.html
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/spot-price/
- https://www.cmegroup.com/education/courses/introduction-to-futures/understanding-futures-expiration-contract-roll.html
- https://www.kotaksecurities.com/share-market/types-of-stock-trading/
- https://diversegy.com/3-things-energy-brokers-need-to-know-about-energy-futures/
- https://www.wallstreetmojo.com/spot-price/
- https://www.investopedia.com/ask/answers/06/futuresconvergespot.asp
- https://www.investopedia.com/terms/s/spotmarket.asp
- https://virtual-peaker.com/blog/buy-low-use-high-energy-arbitrage-explained/
- https://www.schwab.com/learn/story/basics-trading-futures-contracts
- https://www.essex.ac.uk/-/media/documents/departments/economics/khandoker-eesj-s18.pdf?la=en
