How is Index/Stocks Futures price determined?

[rahulskr]

hi friends

i would like to know how the prices of index/stocks futures are determined..... r they solely determined by their underlying asset prices....... like say is nifty futures price determined by nifty spot value...... or is it the buying n selling of nifty futures...... the whole demand n supply thing....... which determines the price....... or is it combination of both......

cheers

 

[praveen taneja]

hi friends

[COLOR="Black"[COLOR="Blue"]]i would like to know how the prices of index/stocks futures are determined[/COLOR[/COLOR]]..... r they solely determined by their underlying asset prices....... like say is nifty futures price determined by nifty spot value...... or is it the buying n selling of nifty futures...... the whole demand n supply thing....... which determines the price....... or is it combination of both......

cheers

Bro your ans is in ur question

 

[AW10]

There are 2 parts to pricing of any derivative product
1) Theoratical price / ideal price
2) Market price

Factors that affect the theoratical price of future are
- Spot Price
- short-term interest rate . This is used to calculate opportunity cost, if the money is used to buy and settle the spot at full price today. For futures txn, buyer earns on the money which is difference of (nifty contract spot value today - margin money blocked). From sellers point of view, it is extra cost that they need to incurr from today till contract expiry so then add this component to spot price.
- number of days to futures expiration/360 . Used to calcualate to opportunity cost till expiry date
- dividends for stocks going ex-dividend prior to futures expiration. If dividend, is to be paid before the expiry, then price of stock will fall as much as dividend is paid on the day after the payment record date. Hence it is reduced from the calculated value above.

Factors that affect the market price of future over and above the theoratical price are
1) Demand and supply
2) Sentiments and views of market players
3) and many other subjective factors that can never be listed completely

Some of the example of this are - In bullish mkt, generally futures are at premium to spot. But in current bearish mkt, even though nifty is going up, the futures are still at discount . Gap between spot and futures gets squeezed near the spot support / resistance levels.. And it widens when there is strong directional move.


Happy Trading