Who determines the price of a futures contract? (2024)

Who determines the price of a futures contract?

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.

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Where do futures prices come from?

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.

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

The price of a futures contract and the number of contracts traded are determined by the forces of supply and demand on the exchange. The buyer of a futures contract is called the: A. Short.

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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.

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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.

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Who controls the futures market?

The Commodity Futures Trading Commission is an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.

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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.

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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.

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How are futures and forwards priced?

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.

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What are the problems with futures contracts?

One of the simplest and commonest risks of futures trading is the price risk. For example, if you buy futures, you expect the price to go up. However, if the price goes down, you are at risk of loss. For futures traders, the biggest risks of futures trading come from the adverse movement of prices.

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Why is future price more than spot?

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.

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Can the futures market be manipulated?

Several types of manipulation can be found in futures markets. These could be carried out in a number of combinations, or independently. “Cornering the market” is perhaps the most popular form of futures manipulation.

Who determines the price of a futures contract? (2024)
Who regulates futures contracts in the US?

Trading of futures on single securities and futures on narrow-based security indexes, collectively called security futures products or SFPs, is jointly regulated by the CFTC and the Securities and Exchange Commission (SEC).

Who clears futures contracts?

Clearing firms, which are known as futures commission merchants in the US and general clearing members in Europe, perform several critical functions in the trading and clearing lifecycle for the futures markets.

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.

What is the difference between spot price and futures price?

The main difference between spot prices and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates. The spot price is usually below the futures price.

How do futures contracts work?

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as the CME Group, the largest futures exchange in the United States.

Do futures lose value over time?

Both futures and options are derivatives, but they behave slightly differently. Traders will have an easier time controlling price movement with futures contracts because, unlike options, futures aren't subject to time decay, and they don't have a set strike price.

Why a futures price differs from a forward price?

Value of futures contract: The value of futures contract differ than the forward prices because they are marked-to-market daily and at the end of each trading days, the value of the futures contract become zero.

How do futures prices change over time?

The futures prices can change over time as market participants change their views of the future expected spot price; so the forward curve changes and may move from contango to backwardation.

How are futures contracts priced differently from forward contracts?

Unlike forward contracts, futures contracts are marked to market daily. As futures prices change daily cash flows are made, and the contract rewritten in such a way that the value of future contracts at the end of each day remain zero.

How much do top futures traders make?


Can I trade futures with $100?

Yes, you can technically start trading with $100 but it depends on what you are trying to trade and the strategy you are employing. Depending on that, brokerages may ask for a minimum deposit in your account that could be higher than $100. But for all intents and purposes, yes, you can start trading with $100.

How much do futures brokers make?

As of Feb 3, 2024, the average annual pay for a Futures Broker in the United States is $66,677 a year. Just in case you need a simple salary calculator, that works out to be approximately $32.06 an hour. This is the equivalent of $1,282/week or $5,556/month.

How not to lose money on futures trading?

7 Tips Every Futures Trader Should Know
  1. Establish a trade plan. The first tip simply can't be emphasized enough: Plan your trades carefully before you establish a position. ...
  2. Protect your positions. ...
  3. Narrow your focus, but not too much. ...
  4. Pace your trading. ...
  5. Think long—and short. ...
  6. Learn from margin calls. ...
  7. Be patient.


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