How is the price of a futures contract determined?

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. For example, the spot price of an asset can be different from its future price.

Why does the futures price of oil converge to the spot price as the futures contract gets close to maturing?

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.

How are futures determined?

To calculate futures, you multiply the stock price by the number of units in the contract. To trade futures, investors must pay in a margin, usually 10\% of the value of the contract, although it can be as high as 20\%. The margin serves as collateral in case the market moves in the opposite direction of the position.

What is the point value of a futures contract?

Points typically refer to futures trading. One point is the smallest price increment change that can occur on the left side of the decimal point. For example, S&P 500 E-Mini (ES) futures might experience a price change from 1314.00 to 1315.00, which is a price change of one point.

What do you mean by futures explain the factors determining price of future contracts?

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.

What are the determinants of a forward futures price?

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.

Why do futures and spot prices converge on the expiry date?

Convergence happens because the market will not allow the same commodity to trade at two different prices at the same place at the same time. The idea that the spot price of a commodity should equal the futures price on the delivery date is straightforward.

How are futures tick values calculated?

To manually calculate tick size:

1. Calculate the base tick value by dividing the Product’s numerator by the denominator.
2. Refer to the associated tick table, and reference the correct upper price limit and Ticks multiplier.
3. Calculate the tick size by multiplying the base tick value by the tick table Ticks multiplier.

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

At the time that the contract is established, the participants lock in the futures price, which is the price that will be paid on the delivery date. The value of a futures contract at any given moment is the current futures price of one unit of the underlying asset times the number of units in the contract.

How are future and forward contract prices determined?

and the futures price for a contract deliverable in T years is F0 , then: F0 = S0 (1+r)T where r is the T-year risk-free rate of interest. This equation relates the forward price and the spot price for any investment asset that provides no income and has no storage costs.