24 June 2022 4:07

Determining Futures price on the delivery date

How will you determine the price of future contract?

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 is the delivery price of a futures contract?

The delivery price is the price at which one party agrees to deliver the underlying commodity and at which the counter-party agrees to accept delivery. The delivery price is defined in a futures contract traded on a registered exchange or in an over-the-counter forward agreement.

Do futures contracts have a range of delivery dates?

Delivery Dates Explained

All futures and forward contracts have a delivery date upon which the underlying commodity must be transferred to the contract holder if they hold the contract until maturity instead of offsetting it with an opposing contract.

Why must the spot price equal the futures price on the settlement date?

As the settlement date approaches, the prices of the futures contract and its underlying asset must necessarily converge, so that on the delivery or settlement date, the futures price will equal the spot price of the underlying asset.

How do futures prices work?

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.

How is forward price calculated?

forward price = spot price − cost of carry. The future value of that asset’s dividends (this could also be coupons from bonds, monthly rent from a house, fruit from a crop, etc.) is calculated using the risk-free force of interest.

Is forward price the delivery price?

Forward price is the predetermined delivery price for an underlying commodity, currency, or financial asset as decided by the buyer and the seller of the forward contract, to be paid at a predetermined date in the future.

What is a delivery price?

Definition of delivered price

: a price for which a seller agrees to deliver merchandise to a purchaser at a designated place and which usually includes the f.o.b. price at the shipping point plus lawful transportation charges actually incurred in delivery.

What happens if you hold a futures contract until expiration?

When the contract expires, the position is automatically closed. If the settlement price of the asset is higher than when your entry price, you have made a profit, but if it’s lower, you have made a loss. Whatever profit or loss realized is added to or subtracted from your account.

Can future 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.

How do the futures and spot prices converge according to the contract period?

Convergence is the movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time. The price of the futures contract and the spot price will be roughly equal on the delivery date.

Do futures prices predict spot prices?

Prices in futures markets sometimes function well as forecasts of spot prices. In other cases, they do not. For example, the federal funds futures market can be used to calculate market forecasts of Federal Open Market Committee (FOMC) interest rate changes.

Can I sell futures before expiry?

Before Expiry

It is not necessary to hold on to a futures contract till its expiry date. In practice, most traders exit their contracts before their expiry dates. Any gains or losses you’ve made are settled by adjusting them against the margins you have deposited till the date you decide to exit your contract.

How does day trading futures work?

Day trading in futures is the strategy used by active traders of the market to gain profit from sudden market movement. It is an act of buying and selling a future contract within the same day without holding a position overnight. In day trading a trader enters and exits all position in the same day.

How do you calculate profit in futures trading?

Quote: Remember WTI has a tick size of 1 cent. The price moved 40 cents therefore this price move was 40 ticks a one tick move is equal to \$10. So a gain of 40 ticks would equal a profit of \$400.

When a futures position is liquidated what price is it based on?

Liquidation price is calculated based on the trader’s selected leverage, maintenance margin and entry price. Example: Trader A buys long at 8,000 USD while using 50x leverage. Example: Trader B sells short at 8,000 USD while using 50x leverage.

Why future price is higher than spot price?

Futures prices above the spot price can be a signal of higher prices in the future, particularly when inflation is high. Speculators may buy more of the commodity experiencing contango in an attempt to profit from higher expected prices in the future.

Which is better contango or backwardation?

During Contango as the future price is higher so the profit is maximum when you sell it in the future. During Backwardation as the future price is going to decrease further in the future, purchasing it later for an investor would be a greater profit.

Which is better spot or futures?

Traders often ask the question, “which market is better to trade, spot or futures?”. The short answer is spot markets if you are looking to make longer-term investments. If you are hoping to hedge your trades or use increased leverage, you will want to trade the futures market.

How do you profit from backwardation?

In order to profit from backwardation, traders would need to buy a futures contract on gold that trades below the expected spot price and make a profit as the futures price converges with the spot price over time.

How can you determine whether a future is in backwardation or contango?

When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

Is backwardation bullish or bearish?

bullish

Backwardation is theoretically a bullish sign for oil, because it means traders no longer have an incentive to store oil and sell it at a later date. Instead, it’s best for them to sell oil now because prices could be lower in the future.