Valuation of Futures

RAVI - IBA

Futures Contract Value

The value of futures contract is rather different from
the value of an otherwise identical forward contract
because of the pay off from a futures contract is
realized at the end of every trading day. The value of
forward, recall, is generally realized at the end of the
contracts term.
So at any time, a futures contact value is driven solely
by how much its futures price has changed since
yesterday (Last working day - Prev. Closure).
The value of futures, is thus, is the difference between
the current futures price and the futures price at end of
the previous trading day when everyone settled up.

Futures Value Long Example

Royal Mill buys wheat to buy to make wheat floor.
In 6 months time Royal plan to buy 5000 bushels of
wheat and they want to lock in a price now. Royal
Mill executes 10 wheat futures contracts at the
Commodity stock exchange with a delivery price
$3.00. Each contract guarantees the delivery of
5000 bushels of wheat in 6 months for $3.00 per
bushel.
Say one day the futures contracts closed at $3.10
and by the middle of next day, the futures price
was $3.20 per Bushel. What is the value of the
position then ?

Futures Value Long Example

FuturesValueLONG =
Number of contracts * Bushels per contract * (F NOW
FYESTERDAY)
= 10 * 5000 * (3.20 3.10)
= $5000
At the moment their futures position has a market
value of $5000. This does not reflect, however the
profits realized and collected previously.
Recall the futures price was 3.00 when Royal Mill put
on these contracts., so prior to now they would
already collected $5000 using the same math.

 To calculate the value of an existing futures contact, we

simply need to current futures price and the futures price
from the previous day. The value is just the difference
between the two.
For position value we, need to know the no. of contracts
involved and whether one is long or short.
Flong = (FPnow FPPreviousClosure) * no. of contracts
Fpnow is the Futures price calculated now, FP PeviousClosure is the
futures price at the end of the prev. trading day. F long is the
fair market value of one long futures contract righ tnow.
Whether the value is +ve or _ve depends on whether the
futures price has increased or decreased.

Futures Long example

Example : You are long 1000 corn
futures. The current furures price is
2.82 per bushel . The futures price
yesterdays close was 2.85. The
Position has become negative value
because the futures price is
dropping;
Flong = (Fpnow FPPrev.Closure) * no. of
contracts.
Flong = (2.82 2.85) * 1000 = -30,000

Futures Short
The formula for a short futures
position is only slightly different.
Fshort = (FPPrev.closure Fpnow) * no. of
contracts.