1. Relationship between Spot & future Price

2. Introduction
Spot Price & Future Price

3. RECAP Delivery option First Notice Day Last Notice Day
Last Trading Day
Deliveries by Cash Settlement

4. Difference between spot & future price

5. Difference between Cash and Future markets
CASH MARKET
FUTURES MARKET
The cash market refers to the buying and selling of physical commodities.
The futures market deals with the buying or selling of future obligations to make or take delivery rather than the actual commodity.
A cash market transaction occurs in the present
A futures market transaction is an agreement for an exchange of the underlying asset in the future.
The costs associated with holding the physical grain until the stated delivery date is referred to as the cost to carry.
the cash price will be cheaper than the futures price due to the expenses related to carrying the commodity until delivery
Futures price is relatively higher than cash price.
FINANCIAL DERIVATIVES/SNSCT/MBA

6. Difference between Cash and Future markets
FINANCIAL DERIVATIVES/SNSCT/MBA

7. RELATIONSHIP BETWEEN FUTRURE PRICE AND SPOT PRICE
Convergence of futures price to spot price:
As the delivery period for a futures contract is approached, the futures price converges to the spot price of the underlying asset.
When the delivery period is reached, the futures price equals-or is very close- to the spot price.
Suppose that the future price is above the spot price during the delivery period. Traders then have a clear arbitrage opportunity:
Sell(Short) a futures contract
Buy the asset
Make delivery
These steps are certain to lead to a profit equal to the amount by which the futures price exceeds the spot price.
As trader exploit this opportunity, the futures price will fall.

8. RELATIONSHIP BETWEEN FUTRURE PRICE AND SPOT PRICE
Convergence of futures price to spot price:
The futures price is below the spot price during the delivery period. Companies interested in aquiring the asset will find it attractive to enter into a long futures contract and then wait for delivery to be made.
The futures price will tend to rise.
The result is that the futures price is very close to the spot price during the delivery period.

9. RELATIONSHIP BETWEEN FUTURE PRICE AND SPOT PRICE
The futures price is above the spot price prior to the delivery period.
The futures price is below the spot price prior to the delivery period.

10. BREAK…..

11. RELATIONSHIPPrice Convergence.mp4 BETWEEN FUTURE PRICE AND SPOT PRICE

12. Understanding Futures Markets
Clearinghouses
Guarantee that the traders will honor their obligations (solves issues of trust).
Each trader has obligations only to the clearinghouse, not to other traders.
Each exchange uses a futures clearinghouse.
Clearinghouses may be part of a futures exchange (division), or a separate entity.
Clearinghouses are “perfectly hedged” by maintaining no futures market position of their own.
Chapter 1
Chapter 1

13. The Function of Clearinghouses in Futures Markets
Obligations without a clearinghouse
Buyer
Seller
Obligations with a clearinghouse
Buyer
Clearing-
house
Seller
Chapter 1

14. Conclusion Difference between spot and future price
Relationship between spot and future price
Clearing house