Pricing of futures
In General, the form of the pricing model of a futures contract traditional. The price is formed under the influence of demand and supply. Theoretical (fair) value of a futures contract can be defined as such the price at which the investor is equally advantageous to purchase the asset at the spot market (immediate delivery) and its subsequent storage up to the time of use or of the receipt of income on it, and the purchase of a futures contract for this asset.
Purchase the asset in advance (prior to the moment of receiving the benefits from it) means that the investor, investing their cash in this asset, will receive less income on him in the form of Bank interest rate on the Deposit. And so he may be forced to incur any additional costs associated with the storage of the assets and/or its insurance (depending on the underlying asset, the underlying futures contract). Therefore, the value of the futures contract is determined by such main factors as:
price asset on the physical market;
date of expiry of a futures contract;
the interest rate;
the costs associated with ownership of the asset (storage, insurance)
other factors (dividends, taxation, fees and Commission expenses)
The mathematical calculation of the value of the futures contract depends on the what factors are accounted for.
If the exchange asset generates some income, for example a dividend on the shares or interest on the bonds, that income should be deducted from the banking interest rate
the price of a futures contract is always different for a certain value of the price of the underlying asset on the spot market, except for the moment when the contract is executed.
The difference between the current price of the underlying asset and the corresponding futures price is called a basis of a futures contract.
A futures contract can be in two States in relation to the price of the underlying asset.
When the price of a futures contract is higher than the price of the underlying asset, such a state is called contango. In this case, the base is positive.
Futures contract a large part of his time is trading in a state of contango.
When a futures contract is trading below the price of the underlying asset, such a state is called бэкврадацией. In this state, the basis of the negative.
When market participants have a good expectation of the market of the underlying asset, a futures contract is trading in a state of contango. In the case of бэквардации, all participants of the disfavoured in relation to the market of the underlying asset.
The basis can be expanded and depart from the normal values because of the great advantages of trading futures compared to trading by the underlying asset. As in the futures market you can open a much larger position than on the spot market, using «the effect of leverage. For this reason, many of the participants, if sure of the growth will buy futures contracts and expand basis.
In a state of бэквардации a similar situation. Using the advantages of opening short positions with the help of futures contracts, many participants in the rush to sell contracts, extending the standard.
Because under the influence of demand and supply price of a futures contract may deviate from its theoretical (estimated) value, there is a possibility of profit, by using the difference in prices on the physical and futures markets.
If the calculated value of the futures contract was above its market price, it means his return, low price compared with the price on the physical market, therefore, can be an asset buy where cheaper, i.e. in the futures market, and sell there, where it is more expensive, i.e. on the physical market. The difference in prices will be arbitrage profit.
Arbitration plays an important role in the financial markets. It aligns the prices for one and the same product in different financial markets (spot, the futures market), the stock exchanges. In fact, this is a profit without risk. But the effectiveness of such a strategy depends on two major factors: first of all, it is liquidity, secondly, the deviation of the prices should be sufficient to cover the exchange and Commission fees. Arbitration involves a large number of transactions involving significant amounts of funding. Such a strategy is accessible far not to all. Rather, it is the mechanical, program work. Thanks to such arbitration operations is provided by the close relationship of the futures market with the physical market.
