Futures Prices

Futures prices are fixed prices, to which the parties of a futures contract agree to transact on a specific date. The futures are standardized financial derivatives or forward contracts that are popularly traded for commodities like indexes, foreign currencies, sugar, corn and much more. Stock exchanges play a critical role in futures trading, creating a vast marketplace for trading and price discovery.

How to Find out Futures Prices?

Futures prices are determined in accordance with the dynamic trends that govern the forces of supply and demand. This is typically done at a time when contracts are closed between a buyer and seller on the stock exchange. At the end of a day’s trading session, the official price indicated on the exchange is known as the settlement price for that particular day. The following formula can be used to estimate futures prices:

Future price = spot price + carry cost

The spot rate is the price at which an underlying instrument is traded in the cash market at any given time. In the case of gold futures, the spot rate is the price at which gold is physically available in the market. Spot rates indicate current prices, while futures prices determine the cost purchasing the instrument in the future.

Carry cost is the interest that is incurred for holding the underlying instrument till the expiration of the futures. For example, if the futures contract expires after 12 months, then carry cost will be the interest that is foregone while holding the underlying instrument for 12 months.

In addition to these two prominent factors, futures prices also depend on storage cost. Storage cost is the cost associated with warehousing of physical commodities such as gold, energy products or agricultural goods.

Notably, this relationship is applicable for stock index futures, commodities futures and Treasury bond futures when these are all in ample supply. During times when they are scarce, the only force that sets the price is the supply and demand for the underlying assets of the futures.

All futures transactions are regulated by the government agencies. In the United States, the regulating body for the futures transactions is the Commodity Futures Trading Commission (CFTC), which is an independent agency of the US government.