7

Looking at Wikipedia's the pricing of futures, I wonder if entering into a futures contract requires one to pay premium just as entering into an option contract? In other words, is the premium of a futures contract always zero?

Is futures price similar to exercise price of an option, or to premium of an option?

Is pricing futures in Wikipedia's the pricing of futures to determine the premium for entering the futures contract, or the price at which to buy or sell the underlying assets at the future maturity time?

Thanks and regards!

5

No, futures do not carry a premium. The premium on an option contract exists because the rights and obligations of the parties involved are not equivalent. On an option, one party has an obligation while the other party has a right to buy or sell at a price (with no obligation to do so). This difference in obligation is why the side that sells the contract receives the premium while the side that buys the contract pays it. The side that gets more choice pays the side that gets fewer.

With futures, the two sides are both obligated to fulfill the contract. Because their obligations are equivalent, neither pays a premium to the other.

3

Future prices can be more or less than the spot price. This may seem like a premium or discount. These differences are due to carrying cost, borrowing cost, and future expectation.

1

The methodology of Futures Pricing is completely different than options pricing.

When buying, say, a gold contract, 100oz * $1700 or so, that's $170,000 I have at risk. The fact that the margin required is some smaller number is beside the point, the margin is regulated by the exchange, but the obligation to cover any loss is all mine, and if the price drops over time, I need to come up with more money.

An option on this amount of gold can be as little as $1/oz, for my right to buy gold at say $2500/oz should it go that high. The most I can lose is that $1/oz or $100 for the contract.

To your question - The future price is often determined by the time value of money and liquidity of the market. Some food commodities actually price lower in the future as there may be a shortage today, but a crop is due in 3 months. Oil may go either way depending on the season. Each future contract will have its own relationship between spot price and the price in 6 months, although the relationship among types, e.g. metals, will be similar to each other, usually.

  • 1
    Thanks! Does a future have a premium, like the one for an option? – Tim Dec 7 '11 at 21:20
  • Uh, no. There may be a difference between the spot price of the underlying asset and the futures price, but it's not referred to as a premium. – JTP - Apologise to Monica Dec 7 '11 at 21:33

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.