Future price - a basic question

[QuantFFM]

Hello David,

just a basic question, but i don't get it (a short answer would be enough):

Assuming the 1 year future price is 900 $.
Shorting the future. What is the meaning of the 900 $?

I dont't understand the difference between the "price I will receive at delivery/expiry " and the "quoted future price" that changes daily (or doesn't it change daily)?
Does that mean I receive after 1 year at maturity/delivery 900 $, regardless what happened meanwhile with the price?

So, if I would short the contract a day later and the price has moved to 950 $ for the same contract, I would get 950 $ at delivery?



Please help me, I'm confused
thx

 

[David Harper CFA FRM]

Hi @QuantFFM sure, imagine a one-year futures contract on Cryptocoin (making this up... ) with a one-year futures price today of $900; i.e., F(0, 12 months) = F(Nov 2018) = $900.00. As the short, you are promising to deliver X units (per the contract) of Crytpocoin on November 2018 in exchange for receiving (getting paid) $900.00. So you are promising to sell in one year at the predetermined price of $900. You are pre-selling. As you enter the contract today, F(0, 12 months) = K, the delivery price. The delivery price of $900.00 will not change. If November 2018 arrives and Cryptocoin is up to $1,800, you are bummed because you need to delivery value of 1,800 in Cryptocoin but you only get paid 900, per the contractual promise.

Until then, in the meantime, the futures price of the Nov 2018 contract will fluctuate (very much with the spot), but next month (imagine going forward in time) that will be the F(0,11 months) = F(Nov 2018); i.e., a contract that matures on the same month, but whose term is 11 months instead of 12 months. While your delivery price will remain at 900, the forward price will change. If next month, it jump up to $1,100.00, maybe you lose your confidence in the short and close out the contract but for a $200 loss. This is why Hull has the present value of forward contract, f = [F(0) - K]*exp(-rT), which is just discounting F(0) - K, where the delivery price (K) on your contract is not changing, but F(0) is changing which directly impacts the value of your contract. I hope that helps! Short enough?

 

[QuantFFM]

Hi David,

yes that's perfect. Thank you for your "short enough" help.;-)

You are doing a great job.

Regards