The gold futures contract specifications are listed below. Per contract, $0.10 is worth $10.00. Sunday through Friday, gold futures trade from 6:00 p.m. U.S. ET to 5:00 p.m. U.S. ET, with a 60-minute break each day commencing at 5:00 p.m. U.S. ET.
What is the price of a futures contract?
Futures are financial derivatives whose value is mostly determined by the prices of the underlying equities or indices. However, the pricing is not as straightforward. In both the cash and derivatives segments, there is still a price gap between the underlying asset. This distinction can be explained using two basic futures contract pricing models. These will allow you to forecast how a stock futures or index futures contract’s price will move. These are the following:
Keep in mind, however, that these models are only a foundation for understanding futures prices. However, understanding these theories provides you a sense of what to expect from a stock or index’s futures price.
What is the Cost of Carry model
Markets are assumed to be perfectly efficient in the Cost of Carry Model. This signifies that the cash and futures prices are same. As a result, arbitrage the practice of traders taking advantage of price disparities in two or more markets is no longer an option.
Investors are unconcerned about spot and futures market pricing while trading in the underlying asset when there is no chance for arbitrage. This is due to the fact that their final profits are the same.
For simplicity’s sake, the model also assumes that the contract is kept until maturity, allowing for a fair price to be determined.
In other words, the price of a futures contract (FP) is equal to the spot price (SP) plus the net cost of carrying the asset until the futures contract’s maturity date.
The cost of retaining the asset until the futures contract matures is referred to as Carry Cost. This might include storage fees, interest paid on the asset while it was being acquired and held, and financing fees, among other things. Any income gained from the asset while it is held, such as dividends and bonuses, is referred to as carry return. The Carry Return is used to calculate an index’s futures price. It refers to the index’s average returns in the cash market during the holding period. The net cost of carry is the sum of these two.
The bottom line of this pricing model is that holding a stake in the cash market might have advantages and disadvantages. A futures contract’s price reflects these expenses or benefits in order to charge or reward you appropriately.
What is the Expectancy model of Futures pricing
According to the Expectancy Model of futures pricing, the futures price of an asset is essentially what the asset’s spot price is expected to be in the future.
This indicates that if the overall market mood is favorable to a higher price for an asset in the future, the asset’s futures price will be favorable.
Similarly, a surge in pessimistic sentiment in the market would result in a drop in the asset’s futures price.
This model, unlike the Cost of Carry model, thinks that there is no relationship between the asset’s current spot price and its futures price. What matters is what the asset’s future spot price is predicted to be.
This is also why many stock market participants use futures price patterns to forecast price fluctuations in the cash market.
What is Basis?
On a practical level, you will see that the futures price and the spot price are frequently different. This distinction is referred to as the basis.
When an asset’s futures price is higher than its spot price, the basis for the asset is negative. This indicates that the markets will likely rise in the future.
If, on the other hand, the asset’s spot price is higher than its futures price, the asset’s basis is positive. This portends a market correction in the near future.
What is the price of gold futures each tick?
The tick size for gold (GC) futures is $0.10 per troy ounce. Because a contract is for 100 troy ounces, the price changes in $10 increments.
How long may a futures contract be held?
A demat account is not required for futures and options trades; instead, a brokerage account is required. Opening an account with a broker who will trade on your behalf is the best option.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) both provide derivatives trading (BSE). Over 100 equities and nine key indices are available for futures and options trading on the NSE. Futures tend to move faster than options since they are the derivative with the most leverage. A futures contract’s maximum period is three months. Traders often pay only the difference between the agreed-upon contract price and the market price in a typical futures and options transaction. As a result, you will not be required to pay the actual price of the underlying item.
Commodity exchanges such as the National Commodity & Derivatives Exchange Limited (NCDEX) and the Multi Commodity Exchange (MCX) are two of the most popular venues for futures and options trading (MCX). The extreme volatility of commodity markets is the rationale for substantial derivative trading. Commodity prices can swing drastically, and futures and options allow traders to hedge against a future drop.
Simultaneously, it enables speculators to profit from commodities that are predicted to increase in value in the future. While the typical investor may trade futures and options in the stock market, commodities training takes a little more knowledge.
For futures, how much margin do you require?
Futures margin is typically 3-12 percent of the notional value of the contract, compared to up to 50 percent of the face value of securities acquired on margin.
What is the best way to trade gold futures?
Markets for Futures Gold can be traded in a variety of ways. The most common method is to use a futures contract, which is an agreement to buy or sell something in the future, such as gold. Purchasing a gold futures contract does not imply that you must take physical ownership of the metal.
What if you don’t sell your futures contract?
It will not be rolled-over if you do not square-off futures. The payment will be made in cash. If you want to roll over, you must square-off manually and then buy stock futures for the next month.
What is the formula for calculating futures roll prices?
An investor who wants to invest in the commodity will purchase a specific contract. In this instance, they will choose a contract with a lengthier term. From the standpoint of a roll yield, the price of a contract will decline or roll down towards the price of the next closest contract as time passes. It will then decrease in price until it reaches the price of the next contract, and so on.
Roll yield is the term for this process, and in the case of contango, the return is negative because prices are declining. In this instance, the investor must decide whether to sell the present contract or wait for it to expire in order to maintain future commodities exposure. They will then reinvest in a contract with a longer term, thus continuing the cycle.
What is Backwardation?
The market is said to be in backwardation when the prices of longer-dated contracts are lower than those of shorter-dated contracts. It can happen when a commodity’s current inventory level is low.
Drought or heavy rainfall, for example, can result in a bad agricultural crop. Commodities for the current season would be in limited supply in such instances, causing contracts for this year’s crop to rise. Because a typical investor buying at market price would sell the contract at a somewhat higher price, the price of the longer-dated contract would roll up to the next closest contract. It is the means by which investors might receive a positive roll yield.
Calculating Roll Yield
An investor must know the rates of the two futures contracts as well as the current price of the underlying asset, which in this example is a commodity, in order to compute roll yield. Assume June soybean futures are trading at $100, and July futures are trading at $95, with the spot price at $100.
Investor X predicted that soybean prices will either stay the same or rise. As a result, she chose to extend the contract until July, although the spot price ($100) remains the same on the expiration date. The roll yield of Investor X would be as follows:
In futures trading, who pays the margin?
Margin money is money put up by the buyer or seller of a futures contract to cover a portion of the total value of the commodities future being bought or sold. This deposit is required by commodity exchange laws and must be made with a registered futures commission merchant (RFCM) prior to the purchase or sale of a futures contract. Margin money is simply an assurance that the trader, who is also the RFCM’s customer, will keep his end of the bargain.
