What is the pricing method of futures contracts?
Basic Futures Pricing. Given that futures contracts are agreements to exchange some commodity, cash, or other asset in the future (the “underling asset”), futures prices must inevitably converge to the underlying asset spot (cash) price at the expiration of the contract.
The price of a futures contract is the spot price of an underlying asset, adjusted for interest, time, and paid out dividends. The variance between the spot price and futures price forms the 'basis of spread. ' The spread is the maximum at the beginning of the series but converges towards the settlement date.
Futures price will be equal to spot price plus the net cost of carrying the assets till expiry. Here carrying costs may include storage costs, interest paid to acquire assets or financing costs. Carrying returns will include any income earned with these assets, like dividends and bonuses.
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.
Futures prices are influenced by various factors, including the current spot price of the underlying asset, interest rates, dividends, carrying costs, and market expectations. These prices are not only essential for hedgers and speculators but also play a fundamental role in maintaining market stability.
The futures price, f0(T), equals the spot price compounded at the risk-free rate as in the case of a forward contract. The primary difference between forward and futures valuation is the daily settlement of futures gains and losses via a margin account.
- Cost-plus pricing. Calculate your costs and add a mark-up.
- Competitive pricing. Set a price based on what the competition charges.
- Price skimming. Set a high price and lower it as the market evolves.
- Penetration pricing. ...
- Value-based pricing.
An option on a futures contract gives the holder the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a predetermined price (the strike price) on or before a certain date (the expiration date).
The Future Cost Engine calculates the expected cost of an item/supplier/origin country/location at a given point into the future. These values are used to help in many scenarios (for example, when trying to determine what a margin will be at a point in the future, or when doing investment buying).
Premium pricing: High price now, high price in the future. Penetration pricing: Low price now, high price in the future. Pricing skimming: High price now, low price in the future. Loss leader: Low price now, low price in the future.
What is an example of a future price?
An asset can have different spot and futures prices. For example, gold may have a spot price of $1,000, while its futures price may be $1,300. Similarly, the price for securities may trade in different ranges in the stock market and the futures market.
A futures contract is similar to a forwards contract, where a buyer and seller agree to set a price and quantity of a product for delivery at a later date.
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.
In general, backwardation is considered a bullish sign for a market, as it indicates strong demand for the underlying asset.
Fair value is the sale price agreed upon by a willing buyer and seller. The fair value of a stock is determined by the market where the stock is traded. Fair value also represents the value of a company's assets and liabilities when a subsidiary company's financial statements are consolidated with a parent company.
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.
In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item transacted is usually a commodity or financial instrument.
A price limit is the maximum range that a futures contract is allowed to move up or down within a single day. Price limits are re-calculated every day. When price limits are reached in one day, the variable price limits might be implemented to expand the initial limits to the variable amount for the next trading day.
- Value based pricing - Price based on it's perceived worth.
- Competitor based pricing - Price based on competitors pricing.
- Cost plus pricing - Price based on cost of goods or services plus a markup.
A limit price (or limit pricing) is a price, or pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market. It is used by monopolists to discourage entry into a market, and is illegal in many countries.
How do I choose a pricing method?
- Determine your value. ...
- Evaluate pricing potential. ...
- Review your customer base. ...
- Determine a price range. ...
- Check out your competitors. ...
- Consider your industry. ...
- Consider your brand. ...
- Gather feedback from customers.
Option Pricing Models are mathematical models that use certain variables to calculate the theoretical value of an option. The theoretical value of an option is an estimate of what an option should be worth using all known inputs. In other words, option pricing models provide us a fair value of an option.
Dividend futures
By going “long” on a dividend future, an investor agrees to pay a prespecified price today in exchange for receiving a future payment equal to the actual dividends paid during a specified period – typically a given calendar year.
[3] The cost of carry model and expectancy model are two key models for determining future prices. The cost of carry model relates future prices to current spot prices and carrying costs, while the expectancy model relates future prices to expected future spot prices.
The future value formula is FV=PV*(1+r)^n, where PV is the present value of the investment, r is the annual interest rate, and n is the number of years the money is invested. The Excel function FV can be used when there is a constant interest rate.
