Futures Equivalent
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.
