What determines the price of a futures contract bought or sold? (2024)

What determines the price of a futures contract bought or sold?

In short, the price of a futures contract (FP) will be equal to the spot price (SP) plus the net cost incurred in carrying the asset till the maturity date of the futures contract. Here Carry Cost refers to the cost of holding the asset till the futures contract matures.

How is the price of a futures contract determined?

In short, the price of a futures contract (FP) will be equal to the spot price (SP) plus the net cost incurred in carrying the asset till the maturity date of the futures contract. Here Carry Cost refers to the cost of holding the asset till the futures contract matures.

What factors determining price of future contracts?

Interest rates are one of the most important factors that affect futures prices; however, other factors, such as the underlying price, interest (dividend) income, storage costs, the risk-free rate, and convenience yield, play an important role in determining futures prices as well.

What is the pricing method of futures contracts?

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.

How do you value a futures contract?

A future contract's notional value is it's contract size multiplied by it's current price. It indicates the value of the underlying asset based on quantity and how much it is trading for, which helps you make decisions about a position and trade.

Does the price of a futures contract change?

On the other hand, the futures price changes depending on market conditions. Moreover, the daily settlement resets the MTM value to zero. Besides, the variation margin is exchanged to cover the difference, decreasing counterparty risk.

Are futures prices determined by supply and demand?

A futures contract price is commonly determined using the spot price of a commodity, expected changes in supply and demand, the risk-free rate of return for the holder of the commodity, and the costs of transportation or storage in relation to the maturity date of the contract.

What are the mechanics of buying and selling futures?

The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

What is the difference between price and value of futures contract?

Price: Forward contracts have a constant price, while futures contracts fluctuate. Value: Forward contract values fluctuate according to the spot price, whereas futures contracts are reset to zero daily after the mark-to-market process.

What is the futures price vs value of futures contract?

The futures price is fixed at the start, whereas the value starts at zero and then changes, either positively or negatively, throughout the life of the contract.

Why would you sell a futures contract?

Hedging with futures: Futures contracts bought or sold with the intention to receive or deliver the underlying commodity are typically used for hedging purposes by institutional investors or companies, often as a way to help manage the future price risk of that commodity on their operations or investment portfolio.

Can futures price be lower than spot?

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.

Why are futures prices higher than spot prices?

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.

How are futures decided?

The spot price refers to the current market price of the asset being traded. In the Indian stock market, the spot price of a stock, index, or commodity serves as the starting point for determining the futures price. Another crucial component in determining futures prices is the cost of carrying.

How do futures work for dummies?

Futures are derivative financial contracts that obligate parties to buy or sell an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Can I sell a futures contract without buying?

Unlike stocks, you can sell futures without making a previous purchase. However, you cannot realize a profit in futures trading until you “flatten” your position – placing an order for the same quantity on the opposite side of the market.

Why buy futures instead of stocks?

If you trade in the futures market, you have access to more leverage than you do in the stock market. Most brokers will only give you a 50% margin requirement for stocks. For a futures contract, you may be able to get 20-1 leverage, which will magnify your gains but will also magnify your losses.

What is the closing price of a futures contract?

The closing price is the price or range of prices at which the commodity futures contract traded during the brief period designated as the market close or on the closing call—that is, the last minute of the trading day.

What happens if you don't sell futures contract?

Settlement. If a trader has not offset or rolled his position prior to contract expiration, the contract will expire and the trader will go to settlement. At this point, a trader with a short position will be obligated to deliver the underlying asset under the terms of the original contract.

What are the disadvantages of futures contracts?

Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.

What are the four factors that affect price planning?

Four key market factors that must be considered when reviewing and establishing prices are: costs and expenses, supply and demand, consumer perceptions, and competition. Most price planning begins with an analysis of costs and expenses, many of which are related to current market conditions.

What are two factors that determine price?

This competition of sellers against sellers and buyers against buyers determines the price of the product. It's called supply and demand. The price is the measure of how scarce one product is compared to all other products and all incomes.

What are the three main factors that influence pricing?

Three important factors are whether the buyers perceive the product offers value, how many buyers there are, and how sensitive they are to changes in price.

What is one example that affects price?

Supply and demand rise and fall until an equilibrium price is reached. For example, suppose a luxury car company sets the price of its new car model at $200,000. While the initial demand may be high due to the company hyping and creating buzz for the car, most consumers are not willing to spend $200,000 for an auto.

What are the two laws of demand?

The law of demand states that a higher price leads to a lower quantity demanded and that a lower price leads to a higher quantity demanded. Demand curves and demand schedules are tools used to summarize the relationship between quantity demanded and price.