Futures

[Angelinelyt]

hi please can I quickly ask why is there no cos to enter into a futures contract? I am sorry but I a very new to the finance community. Many thanks!

 

[David Harper CFA FRM]

Hi @Angelinelyt Welcome! J. Hull has good introductory chapters on this, but in a nutshell, there is no price to enter a futures contract because it is a just a promise to buy/sell the commodity at a future date at a given price, and the price (being market-determined) is considered fair to both sides such that at inception the net present value of the contract is zero to both sides (this highlights how the contract's strike price is different than the contract's value). In contrast to an option, being asymmetric, where the option has a non-zero value at inception so the buyer must pay for it. Now, while the initial value (price or cost) is zero, keep in mind, that both parties do pay into margin accounts, depending on the value changes in the contract. I hope that's helpful, thanks!

 

[mkh]

Great explanation David, thanks always for taking time to explain to people who are new to finance . even though they may be trivial to you. Appreciate your patience .