Future contracts and its valuation
Index Futures or stock future are financial instruments on which traders speculate or hedge on price movements. But have you ever wondered why futures and spot prices converge on expiry? The answer lies in something called the carry cost.
Lets discuss about future contracts :
An agreement to buy or sell an asset at a predetermined price at a future date. It is widely used in derivative market by speculators to gain on stocks. indices and commodities.
What Is Carry Cost?
Carry cost refers to the cost of holding a position until the expiry date. It includes:
Financing cost (interest if borrowed capital is used)
Storage cost (for physical commodities)
Dividends foregone (if trading futures instead of holding stocks)
These costs (or sometimes benefits) are factored into the pricing of futures.
That means futures mostly trade at a premium or discount to the current (spot) price depending on the carry cost.
Why Do Futures Match Spot Price on Expiry?
On the expiry date, the futures contract must be settled. Since there's no time left for carry costs to accumulate, the futures and spot prices must converge—this is known as convergence.
Whether you're day trading or learning long-term strategies through a Intraday Trading Course in Dehradun, understanding this convergence is crucial. Looking for Best Stock Market Course Near Me, MHV Education helps you understand all about derivative markets.
Final Thoughts
Learning about futures, carry cost, and expiry convergence gives you a solid edge in trading. If you're looking to get hands-on training, consider enrolling in the Best Stock Market Institute in Dehradun that covers derivatives, technical analysis, and real-time trading strategies.
Start mastering the markets where it all makes sense—from the basics to the most advanced tools.
Lets discuss about future contracts :
An agreement to buy or sell an asset at a predetermined price at a future date. It is widely used in derivative market by speculators to gain on stocks. indices and commodities.
What Is Carry Cost?
Carry cost refers to the cost of holding a position until the expiry date. It includes:
Financing cost (interest if borrowed capital is used)
Storage cost (for physical commodities)
Dividends foregone (if trading futures instead of holding stocks)
These costs (or sometimes benefits) are factored into the pricing of futures.
That means futures mostly trade at a premium or discount to the current (spot) price depending on the carry cost.
Why Do Futures Match Spot Price on Expiry?
On the expiry date, the futures contract must be settled. Since there's no time left for carry costs to accumulate, the futures and spot prices must converge—this is known as convergence.
Whether you're day trading or learning long-term strategies through a Intraday Trading Course in Dehradun, understanding this convergence is crucial. Looking for Best Stock Market Course Near Me, MHV Education helps you understand all about derivative markets.
Final Thoughts
Learning about futures, carry cost, and expiry convergence gives you a solid edge in trading. If you're looking to get hands-on training, consider enrolling in the Best Stock Market Institute in Dehradun that covers derivatives, technical analysis, and real-time trading strategies.
Start mastering the markets where it all makes sense—from the basics to the most advanced tools.
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