Why is futures price higher than spot? (2024)

Why is futures price higher than spot?

It indicates that demand is higher than supply in the short term, causing futures prices to rise. Futures prices rise above spot prices because investors become comfortable paying more for the future assets. However, commodity and volatility funds are structured to buy short-term futures.

Why are futures prices higher than spot prices?

The main difference between spot prices and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates. The spot price is usually below the futures price. The situation is known as contango.

Can future price be less than spot price?

This situation is called backwardation. For example, when futures contracts have lower prices than the spot price, traders will sell short the asset at its spot price and buy the futures contracts for a profit. This drives the expected spot price lower over time until it eventually converges with the futures price.

Why futures are better than spot?

High leverage: Futures trading often involves higher leverage than spot trading, which can amplify profits. Predictable costs: Futures trading fees are generally fixed, providing traders with more predictable costs.

Why future price is higher than forward price?

If futures prices are positively correlated with interest rates, then futures prices will exceed forward prices. If futures prices are negatively correlated with interest rates, then futures prices will be lower than forward prices.

Can futures price be higher than spot?

Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset's price is expected to rise over time. That results in an upward-sloping forward curve.

Do futures prices predict spot prices?

How Do Futures Prices Affect Spot Prices? It's actually more the other way round: Spot prices influence futures prices. A futures contract price is commonly determined using the spot price of a commodity—as the starting point, at least.

Why is gold always in contango?

Generally speaking, contango is a normal situation for durable and easily storable commodities which have a cost of carry, such as gold. This is due to the carry costs - higher futures price is a way of paying for these costs. Indeed, gold spends most of the time in contango.

What is the relationship between futures and spot price?

If the net marginal convenience yield is positive and large, the spot price will exceed the futures price (futures market exhibits strong backwardation); however, if the net marginal convenience yield is negative, the spot price will be less than the futures price (the futures market is in contango).

How do you convert future price to spot price?

Why are futures so profitable?

What trading futures essentially means for the investor is that they can expose themself to a much greater value of stocks than they could when buying the original stocks. And thus their profits also multiply if the market moves in his direction (10 times if the margin requirement is 10%).

Why are futures high risk?

This is because futures contracts are leveraged, which means you can control a large position with a relatively small amount of investment upfront. 9 While leverage can amplify your gains, it can also magnify your losses.

Is spot safer than futures?

Simple to use: Spot trading is relatively straightforward, especially for those new to trading. Less risky: It's less risky than margin and futures trading, which means your losses are limited to the capital you put in.

What drives futures prices?

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.

How can traders take advantage of backwardation?

The easiest way to take advantage of a backwardation market state is to simply buy the underlying asset. This is because, in a backwardation market, the spot price is usually lower than the future price. So, by buying the asset now, you can sell it in the future at a higher price and pocket the difference.

What is the fair value of a futures contract?

Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates.

Does futures follow spot?

It is vital to remember that futures prices are determined from underlying spot prices by factoring in time, interest rates, and carrying costs through a process known as futures pricing or arbitrage.

Why are futures and spots different?

The main difference is the delivery date. Spot markets offer immediate or short-term delivery, while futures markets set delivery for a specified future date. In futures markets, prices result from buyer-seller agreements, whereas spot market prices reflect current supply and demand.

Which is better spot or futures trading?

Spot trading is better for long-term investing because you are buying and holding the actual asset without borrowing funds or using leverage. Futures trading is better for short-term speculation, leverage, hedging, and shorting.

Is contango bullish or bearish?

Contango refers to a situation where the futures price of an underlying commodity is higher than its current spot price. Contango is considered a bullish sign because the market expects that the price of the underlying commodity will rise in the future and as such, participants are willing to pay a premium for it now.

How do you profit from backwardation?

Backwardation for Investors

If you think the price of a commodity will fall in the future as predicted by the backwardation curve, one way to make money is by short selling near-term futures contracts which you then offset by buying another futures contract for a later date.

How do you profit from contango?

Placing a Spread Trade

Another way for traders to profit off a contango market is to place a spread trade. Going back to the example, say a trader believes that the spot price of oil will go even lower versus the future month's contract. A trader would short the spot month contract and buy the further out month.

Why do futures and spot prices converge?

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. As arbitragers continue to do this, the futures price and the spot price will slowly converge until they are equal, or close to equal.

What is the difference between spot price and futures price?

The spot price relates to the current market value of a particular asset, and will go up or down in real time based on market demand. By contrast, futures markets rely on contracts between traders, which determine the price of the underlying at a set point in the future.

Do you get dividends on futures?

You do not receive any dividends if you are holding on to stock futures.