What are the 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 difference between spot price of an asset and the futures price?

The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. In contrast to the spot price, a futures price is an agreed upon price for future delivery of the asset.

What determines spot price?

A spot price is the fluctuating market price for an asset bought or sold on commodity exchanges contracted for immediate payment and delivery. The spot price of gold is determined by the forward month’s futures contract with the most volume.

How does spot price affect futures price?

As arbitrageurs short futures contracts, futures prices drop because the supply of contracts available for trade increases. Subsequently, buying the underlying asset causes an increase in the overall demand for the asset and the spot price of the underlying asset will increase as a result.

Why do spot and futures prices converge?

As the futures get closer to expiry, the prices will naturally converge . This is because the futures price is in effect a price in the future (the price at expiry) that takes into account the cost of carry. If this premium or discount gets out of equilibrium the forces of supply and demand will react.

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.

What is the difference between spot and futures?

The spot price of a commodity is the current cash cost of it for immediate purchase and delivery. The futures price locks in the cost of the commodity that will be delivered at some point other than the present—usually, some months hence.

Why are futures prices higher than spot prices?

Spot and futures prices differ, because the financial markets are always looking forward, and adjusting expectations accordingly. The basis is the difference between the local spot price of a deliverable commodity and the price of the futures contract for the earliest available date.

What is the difference between spots and futures?

Why forward and futures prices differ?

Futures prices can differ from forward prices because of the effect of interest rates on the interim cash flows from the daily settlement. If futures prices are negatively correlated with interest rates, then it is more desirable to buy forwards than futures.

How are futures prices different from spot market prices?

Futures prices are different from spot market prices Although futures prices settle on a daily basis, marked-to-market, the price of the futures contracts differ from the underlying spot or cash market. The cost of holding a futures contract include interests, financing costs, and storage costs to name a few.

How are futures contract prices determined?

A futures contract price is commonly determined using the spot price of a commodity—as the starting point, at least.

How do you calculate commodity futures prices?

Calculate commodity futures prices by adding storage costs to the spot price of a particular commodity. Multiply the resulting value by Euler’s number raised to the risk-free interest rate multiplied by the time to maturity. Generally, futures prices and spot prices are different because the market is always forward looking.

What is the futures market and how does it work?

The futures market exists because producers want the safety that comes with locking in a reasonable price in advance, while futures buyers are hoping that the market value of their purchase rises during the interim before delivery. What Is the Difference Between Spot Price and Futures Price?