Question

Do futures prices contain information about future spot prices?

Do futures prices contain information about future spot prices?

Homework Answers

Answer #1

Future prices basically are the prices for buying and selling of an asset at some later date at a price predetermined today.Future contracts are basically standardised and requires initial margin, maintenance margin and variation margin.Future contracts are repriced everyday and evolves no counter party default risk as the clearing house is the counter party and traders deposit margin.

As per Pure Expectations theory, future price is equal to expected spot price on the delivery date i.e future price is an unbiased estimate of expected spot rate. Hence, as per theory the future price cannot deviate from future spot price leading to no profits in both long and short position. But there is always risk premium available which induces the traders to take up a position whether long or short. However , pure expectations theory depends upon estimates only.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. If futures prices are lower than the expectations of spot prices in the future, a....
1. If futures prices are lower than the expectations of spot prices in the future, a. Hedgers and speculators will take the same positions b. Speculators will take a net long position c. Speculators will take a net short position d. Hedgers will take a net long position 2. Which of the following statements is true about emerging technologies and innovations in the financial sector a. They will increase the number of intermediaries who help facilitate the provision of financial...
58. About the Term Structure of Commodity Prices : A. Contango refers to futures prices that...
58. About the Term Structure of Commodity Prices : A. Contango refers to futures prices that rise with time to maturity (The futures price trades below the expected spot price) B. Backwardation implies a negative roll yield C. Contango implies a positive roll yield D. Backwardation refers to futures prices that decline with time to maturity (The futures price trades below the expected spot price) 59. About the components of Commodity Futures Excess Returns: A. The key driver of the...
1.) As with options, the relationship between futures prices and spot prices tend to be kept...
1.) As with options, the relationship between futures prices and spot prices tend to be kept in check by what? 2.) The price of goods today is the price that one could buy it at in the ___________ or _________ market. 3.) If you sell a futures contract and are assigned at expiration, what actually occurs?
Prices of bond futures can be used to access the markets expectations about future interest rates...
Prices of bond futures can be used to access the markets expectations about future interest rates and therefore can be used as the basis for pricing other financial securities. A 10-year annual coupon bond with face value $1,000 is currently selling for $919. The futures price of this bond for delivery in 1 year is $888. The bond pays coupon of $88 annually. Assume that the coupon is paid before the delivery of the bond. (a) What is the 1-year...
Prices of bond futures can be used to access the markets expectations about future interest rates...
Prices of bond futures can be used to access the markets expectations about future interest rates and therefore can be used as the basis for pricing other financial securities. A 10-year annual coupon bond with face value $1,000 is currently selling for $919. The futures price of this bond for delivery in 1 year is $888. The bond pays coupon of $88 annually. Assume that the coupon is paid before the delivery of the bond. (a) What is the 1-year...
For a futures hedge, what do you do to get the proceeds with different spot rates...
For a futures hedge, what do you do to get the proceeds with different spot rates and one set futures rate? futures rate: 2.85 Spot rates: 1.20-1.40 Receivalbes: 62500 how do you get the different proceeds to graph the futures hedge? (proceeds or profit)
An analyst for Bloom Ltd, gathered the following information with regards to futures contract: *Current spot-market...
An analyst for Bloom Ltd, gathered the following information with regards to futures contract: *Current spot-market price of R60 * Risk-free interest rate of 8.87% per annum *The six-month future contract is priced at R62.60 Question Given that the actual futures price of the contract is R59, describe the strategy an arbitrageur could follow
The financial industry tends to treat forward prices and futures prices as being equivalent as we...
The financial industry tends to treat forward prices and futures prices as being equivalent as we did in class. While this is virtually true, there may be some differences due to marking to market. Justify the following statements: (1) “If the correlation between the spot price and interest rates is strongly positive, then the futures price is larger than the forward price”. However, (2) “if the correlation between the spot price and interest rates is strongly negative, then the futures...
Suppose that spot and futures prices of the underlying asset when hedge is initiated are $26.50...
Suppose that spot and futures prices of the underlying asset when hedge is initiated are $26.50 and $24.20 respectively, and when hedge is closed out are $25.00 and $24.99 respectively.which one is true from the followings? 1.effective price paid = $24.21 2.Basis risk when hedge is closed out = $2.3 3.both 1 & 2 4.none of the above
When the foreign exchange (FX) futures market is used for price discovery: One will generally not...
When the foreign exchange (FX) futures market is used for price discovery: One will generally not see steadily appreciating or depreciating pricing patterns, with price discovery occurring on contract expiration dates in the FX market. FX forward prices are subjective predictors of future spot exchange rates. The pattern of the prices of these contracts provides information as to the market’s current belief about the relative future value of one currency versus another at the scheduled expiration dates of the contracts....