Adjusted Futures Price
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Adjusted Futures Price
The value of the cash-alternative version of a futures contract is referred to as the adjusted futures price. Here we see what the adjusted futures price is, how it works and what benefits it provides.
What is Adjusted Futures Price?
Adjusted futures price can be regarded as the cash version of a futures contract, which is to be later used for buying an asset. What makes it different from the futures price is that it considers carrying expenses along with any conversion factors that may have emerged. Hence, the term Adjusted Futures Price.
Understanding Adjusted Futures Price
When a potential investor is in the futures market for a contract, he is bound to face an adjusted futures price. The adjusted futures price is essentially the value of an underlying asset when multiplied by the conversion factor. The conversion factor can be defined as the total number of underlying assets that are yet to be transferred. Adjusted futures price also considers any additional costs that could be involved in a particular transaction, including carrying costs and transportation costs.
How Adjusted Futures Price works?
Adjusted futures prices are calculated based on three factors, the value of all the underlying assets, carrying costs and transportation costs. It helps new investors quickly calculate all the underlying and secondary costs related to a futures contract.
Benefits of Adjusted Futures Price
Adjusted futures price allows potential investors to calculate how much it would cost them if they decide to buy, finance, and transfer any or all the underlying assets mentioned in the contract. This makes the job of the investor much easier.
Frequently Asked Questions
Back-adjusted futures contracts allow potential investors to view any pricing fluctuations that may happen in a futures market on account of trading activity. This can be quite helpful but it is not without its flaws. It may also show pricing levels that are falsified in nature.
Every asset in the market has a certain value and hence carries certain prices. However, natural and agricultural assets, among others, often carry different prices. These prices are spot price and futures price. The spot price refers to the current price of the asset along with any transportation cost. This type of purchase and payment is done on the spot. Hence the name spot price. The futures price refers to the purchase of an asset that will happen sometime in the future. You are essentially locking in the purchase of an asset in the future. So, the asset will have to be kept in a storage unit until that future purchase date arrives. So, the cost of storage, delivery, or any additional cost due to an unforeseeable accident will also be calculated on top of the actual value of the asset. This is called the futures price and that’s how it differs from the spot price.
The futures price can be higher than the spot price if the trader who’s in possession of the asset expects the price to rise, but the reverse is also possible, although rare. In some cases, the spot price can be higher than the futures price and it’s called backwardation. Backwardation happens when the demand for the asset in the current market is higher temporarily. Traders often benefit whenever spot price rises above the futures price.
The futures price is inversely proportional to interest rates. So, when interest rates rise, which is known to happen, the futures price may decrease as the value of the underlying asset falls.
The futures price is calculated based on factors, such as the value of the underlying asset, any storage or carrying cost, transportation cost, and/or any accidental cost.
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