Futures Equivalent
The futures equivalent is a theoretical asset that has the same value and payoff structure as a particular futures contract. It is calculated by taking the current spot price of the underlying asset and adding the implied cost of carry for the contract.
Formula for Futures Equivalent:
Futures Equivalent = Spot Price + (Cost of Carry x Time to Maturity)
Where:
- Futures Equivalent: The value of the futures equivalent asset.
- Spot Price: The current spot price of the underlying asset.
- Cost of Carry: The implied cost of carry for the futures contract.
- Time to Maturity: The time remaining until the expiration of the futures contract.
Calculation:
To calculate the futures equivalent, you need to follow these steps:
- Determine the cost of carry for the futures contract. This can be found in the market or from a financial website.
- Calculate the time to maturity of the futures contract in years.
- Multiply the cost of carry by the time to maturity.
- Add the result to the spot price.
Example:
Suppose you are interested in a futures contract on a stock with a current spot price of $100. The cost of carry for the contract is 2%. The time to maturity is six months, which is equivalent to 0.5 years.
Futures Equivalent = $100 + (0.02 x 0.5) = $101
Therefore, the futures equivalent value for this contract is $101.
Uses:
- To estimate the future price of an asset.
- To hedge against potential price fluctuations.
- To speculate on the future price of an asset.
Note:
The futures equivalent is a theoretical asset and does not exist physically. It is used for theoretical purposes only.
FAQs
What is the futures equivalent position?
The futures equivalent position refers to the equivalent value of a position in underlying assets, such as stocks, expressed in terms of futures contracts. It allows for easy comparison between futures and other types of holdings.
What is the futures equivalent basis?
The futures equivalent basis is the difference between the spot price of an asset and its futures price. It reflects market expectations of factors like interest rates, dividends, and carrying costs.
What is open interest in futures?
Open interest in futures represents the total number of outstanding futures contracts that have not been settled or closed. It indicates market activity and liquidity.
What is a synthetic futures position?
A synthetic futures position is created by using a combination of options (such as buying a call and selling a put) to replicate the profit/loss profile of a futures contract.
What is an example of F&O trading?
An example of F&O (Futures and Options) trading is buying a Nifty futures contract, where the trader agrees to buy the Nifty index at a future date at a predetermined price, betting on its price movement.
