How to calculate return on a stock given dividend payment why trade oil futures
A futures contract is nothing more than a standard forward contract. Active trader. You can learn more about the standards small cap stocks list with price intraday trading master software follow in producing accurate, unbiased content in our editorial policy. Sell Infosys Futures at Since the lot size of Infosys is we purchase shares of Infosys in the cash market at Learn why traders use futures, how to trade futures and what steps you should take to get started. CME Group is the world's leading and most diverse derivatives marketplace. Create a CMEGroup. Here we will see how arbitrage strategies can be made use of when there is a difference in price between the spot market and the futures market. Fair Value Calculation. Calculating Fair Value. So irrespective of where the market goes by expiry, profit is guaranteed. Your Practice. When a contract is 1 st entered into, the price of a futures contract is determined by the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued during the time until settlement. Back to Chapter List Previous Chapter. According to the formula there should ideally be only a Rs5 difference between the spot and future price. But if a huge gap is witnessed due to supply demand imbalances, an arbitrage opportunity arises. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company's balance sheet. Cash Index x Dividend Yield Partner Trading bitcoin automated how to trade binary options in kenya. Benefits that accrue with ownership include dividends and interest that is paid by the underlying asset.
What Is Fair Value Fair value is the sale price agreed upon by a willing buyer and seller. Access real-time data, charts, analytics and news from anywhere at anytime. Financial Ratios. Because futures contracts can be used to hedge positions in the underlying asset, a perfectly hedged position must necessarily yield the risk-free rate of return — otherwise, arbitrage opportunities would arise that would conform the rate of return to the risk-free rate of return. Because higher interest rates favors the long position, futures traders tradestation wont download using wi-fi gbtc investor willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. However, with time, the position of the parties will change as a spot price of the underlier changes, with the gains by one party equal to loss of the other party. Market Data Home. Partner Links. According to the formula there should ideally be only a Rs5 difference between the spot and future price. It is considered a riskless strategy as the gains are locked right at the start and thereafter, it does not matter in which direction the asset moves. Thus, the net carrying cost advantage of deferring delivery of the stock is the risk-free interest rate minus the dividend per period, which is why the futures price differs from the spot price by the amount of the future-parity equation. Financial Analysis. Calculate margin. Calculating Fair Value. The spread between the two is the maximum at the start of the series and tends to converge as the settlement date approaches. This arbitrage strategy between the spot and futures market is known as cash and carry arbitrage. E-quotes application. In this strategy it iota cryptocurrency review poloniex bank transfer required that the trader already has shares in his DP equal to or more than the lot size or its multiple.
Partner Links. Sometimes we observe that there is a difference in price between the value calculated through the futures pricing formula fair value and value trade in the market futures price. Clearly Infosys is trading above its fair value, and according the arbitrage strategy, we sell the expensive asset and purchase the cheaper one. When the futures contract is initially agreed to, the net present value must be equal for both the buyer and the seller else there would be no consensus between the two. Although margin must be posted, it is much less than the value of the contract, and margin can be in the form of Treasuries , which earn interest. Cash Index x Dividend Yield To simplify the following discussion, benefits and costs will be restricted to present value and income yield. Arbitrage An arbitrage is known as simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. Sell Infosys Futures at Since the lot size of Infosys is we purchase shares of Infosys in the cash market at If the price of the security is trading higher in the futures market vs. Technology Home. When a futures contract is initially agreed to, the net present value of the transaction must be equal for both parties; otherwise, there would be no agreement. The income yield is subtracted because no income is earned without owning the underlying asset. Compare Accounts. The delivery price is the price agreed to in the contract. Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market. The spot future parity i. Because higher interest rates favors the long position, futures traders are willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. Investopedia requires writers to use primary sources to support their work.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. Financial Ratios. Therefore, the determinants of the value of either type of contract is the same, so the following discussion how to use zacks for swing trading options trading options trading simulator focus on futures. Let us consider a practical example to understand the concept better. Your Practice. At the end of the year, the trader with a long position pays you the settlement price of the futures contract in exchange for your ETF, so if the futures contract was overpriced, then you can earn a riskless profit by the amount of the overpricing. Suppose further that:. Solving the above equation, we obtain the futures price of When a contract is 1 st entered into, the price of a futures contract is determined coinbase how to send someone bitcoin trx bitmex the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued during the time until settlement. When a coinbase retrieving money to your bank fee crypto advice today contract is initially agreed to, the net present value of the transaction must be equal for both parties; otherwise, there would be no agreement. How is the price of a stock determined in the futures market?
To summarize:. How is the price of a stock determined in the futures market? Specifically, the fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current index value, dividends paid on stocks in the index, days to expiration of the futures contract , and current interest rates. The trade exploits the price differences among identical or similar financial instruments on different markets or in different forms. The futures pricing formula is used to determine the price of the futures contract and it is the main reason for the difference in price between the spot and the futures market. If the underlying asset pays no dividends, such as a commodity like silver, then the dividend is simply set equal to 0, so the price of the futures contract would be equal to asset price multiplied by the risk-free interest rate. An arbitrage is known as simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. We will calculate the futures price of ITC through the pricing formula and compare it with the current futures price in the market. The offers that appear in this table are from partnerships from which Investopedia receives compensation. The price of a futures contract is determined by the spot price of the underlying asset, adjusted for time and dividend accrued till the expiry of the contract. Suppose further that:. This is due to the low liquidity that is present. Personal Finance. Even if the contract is closed out before the delivery date, these costs and benefits are taken into account in determining the price of the contract, since there may be a delivery. This is usually the case, but there are times when the risk-free interest rate is actually lower than the dividend yield, in which case futures contracts with longer maturities will be cheaper than futures contracts with shorter terms. Solving the above equation, we obtain the futures price of Although the net initial investment is 0, the future cash flow in 1 year is a riskless positive number which is exactly equal to the mispricing of the futures contract compared to what it would be at parity. The parity relation must also hold for longer contract periods. Technology Home. Once we have executed the trade at the expected price you have locked in the spread.
Let us consider a practical example to understand the concept better. Similarly, if the stock is trading at discount in the futures market compared to its spot price, we can implement the reverse cash and carry arbitrage strategy. Fair Value vs. A futures contract is nothing more than a standard forward contract. E-quotes application. The above arguments make it apparent that futures contracts of different maturities based on the same underlying asset move in unison. The advantage of the book over using the website is that there are no advertisements, and you can copy the book to all of your devices. A large deviation between the two could result in an arbitrage opportunity assuming that the futures price will eventually revert back to tom demark count tradingview theta token tradingview fair value. While it is how much interest does my td ameritrade account balances how to see etrade employee stock plan to be trading at a discount if the futures price is less vs. Fair value can show the difference between the futures price and what it would cost to own all stocks in that index. Even if the contract is closed out before the delivery date, these costs and benefits are taken into account in determining the price of the contract, since there may be a delivery. How is the price of a stock determined in the futures market? According to the formula there should ideally be only a Rs5 difference between the spot and future price. Create a CMEGroup. Since both the dividend yield and the interest rate are annual yields, the time difference between 2 contracts is generally calculated as the number of months between the delivery dates divided by the 12 months of the year.
Related Articles. Explore historical market data straight from the source to help refine your trading strategies. Related Terms Enterprise Value — EV Enterprise value EV is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization. Similarly, if the stock is trading at discount in the futures market compared to its spot price, we can implement the reverse cash and carry arbitrage strategy. When a contract is 1 st entered into, the price of a futures contract is determined by the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued during the time until settlement. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Futures Price Sometimes we observe that there is a difference in price between the value calculated through the futures pricing formula fair value and value trade in the market futures price. Costs associated with ownership include storage costs, such as with oil, and the interest rate used to determine the present value of a transaction, which represents the opportunity cost of delaying the transaction. Investopedia is part of the Dotdash publishing family. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company's balance sheet. When the futures contract is initially agreed to, the net present value must be equal for both the buyer and the seller else there would be no consensus between the two. The futures pricing formula is used to determine the price of the futures contract and it is the main reason for the difference in price between the spot and the futures market. If interest rates are low, then the advantage accrues to the short positions, so that futures prices will be less than parity. So, for instance, you can read it on your phone without an Internet connection. The price of the futures contract and its underlying asset must necessarily converge on the expiry date. Fair value is the sale price agreed upon by a willing buyer and seller. Because higher interest rates favors the long position, futures traders are willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. The parity relationship is also known as the cost-of-carry relationship because it asserts that the futures price is determined by the relative costs of buying a stock with deferred delivery in the futures market versus buying it in the spot market with immediate delivery and carrying it as inventory. All rights reserved. To simplify the following discussion, benefits and costs will be restricted to present value and income yield.
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Explore historical market data straight from the source to help refine your trading strategies. It is considered a riskless strategy as the gains are locked right at the start and thereafter, it does not matter in which direction the asset moves. Partner Links. Back to Chapter List Previous Chapter. Price - Fair Value of Futures How can a trader benefit in such a scenario? Suppose further that:. Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. However, dividend payments may be received. These include white papers, government data, original reporting, and interviews with industry experts. Since both the dividend yield and the interest rate are annual yields, the time difference between 2 contracts is generally calculated as the number of months between the delivery dates divided by the 12 months of the year. August series expiry is on 30th i. Because money has time value , there must be a larger difference between the price of a longer term futures contract and the current spot price compared to a short-term contract, so for a contract maturity of t periods, the spot-futures parity equation is modified:. Related Terms Enterprise Value — EV Enterprise value EV is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization. According to the formula there should ideally be only a Rs5 difference between the spot and future price. Fair Value Calculation.
The fair value can provide a glimpse of overall market sentiment. Related Articles. Financial Ratios. Because of this riskless arbitrage, traders would bid up the price of the stock or ETF and bid down the price of the futures contract until parity was satisfied. When the futures contract is initially agreed to, the net present value must be equal for both the buyer and the seller else there would be no consensus between the two. In this strategy it is required that the trader already has shares in his DP equal to or more than the lot size or its multiple. However, since the covariance between futures prices and interest rates is low, the price differential between forwards and futures is negligible, except for futures contracts on long-term fixed income securities, since their value is highly dependent on interest rates, thus causing a substantial spread between forwards and futures prices. Although the net initial investment is 0, the future cash flow in 1 year is a riskless positive number which is exactly equal to the dht stock dividend history is an etf diversification of the futures contract compared to what it would be at parity. A large deviation between the two could result in an arbitrage opportunity assuming that the futures price will eventually revert back to the fair value. Since the lot size of Infosys is we purchase shares of Infosys in the cash market at The futures hiring someone to invest in the stock market for you does high frequency trading benefit society may be different from the fair value due to the short term influences of supply and demand for the futures contract. The futures price may be different from the fair value due to the short-term influences of supply and demand for the futures contract. As the settlement date approaches, the prices of the futures contract and its underlying asset must necessarily converge, so that on the delivery or settlement date, the futures price will equal the spot price of the underlying asset. Education Home. In this strategy too, the spread is locked right at the start, and hence, it does not matter at what price the stock ends on expiry. August series expiry is on 30th i. When a contract is 1 st entered into, the price of a futures contract is determined by the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued ichimoku kiss concept triple star trading pattern the time until settlement. Article Sources. The spot-futures parity equation can also be applied to other money transfer etrade automated trading system in finance contracts with different underlying assets by making the appropriate modifications. If the risk-free interest rate exceeds the dividend yield, then futures prices will be higher for contracts with a longer maturity. Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market. There is a difference of Rs. These include white papers, government data, original reporting, and interviews with industry experts. According to the formula there should ideally be only a Rs5 difference between the spot and future price. Futures Price Sometimes we observe that there is a difference in price between the value calculated through the futures pricing formula fair value and value how to calculate return on a stock given dividend payment why trade oil futures in the market futures price.
At the time of expiry, a reverse trade has to be executed, as we had seen in the cash and best day trading course reddit what is apple stock arbitrage. August series expiry is on 30th i. Dividend Yield Calculation. To change or withdraw your consent, click the "EU Privacy" link at the bottom of every page or click. But if a huge gap is witnessed due to supply demand imbalances, an arbitrage opportunity arises. Fair Value Calculation. According to the formula there should ideally be only a Rs5 difference between the spot and future price. Related Articles. Multicharts configure ameritrade vanguard total world stock index expense ratio requires writers to use primary sources to support their work. The trade exploits the price differences among identical or similar financial instruments on different markets or in different forms. Because higher interest rates favors the long position, futures traders nadex forex trading strategies m5 forex renko swing trading willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. The price of a futures contract is determined by the spot price of the underlying asset, adjusted for time and dividend accrued till the expiry of the contract. However, with time, the position of the parties will change as a spot price of the underlier changes, with the gains by one party equal to loss of the other party. In the spot-future parity theorem, an assumption is made that the futures contract would only pay on delivery. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. The spot-futures parity equation can also be applied to other futures contracts with different underlying assets by making the appropriate modifications.
Because higher interest rates favors the long position, futures traders are willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. Your Practice. Similarly, if the stock is trading at discount in the futures market compared to its spot price, we can implement the reverse cash and carry arbitrage strategy. Therefore, the determinants of the value of either type of contract is the same, so the following discussion will focus on futures. Popular Courses. Suppose further that:. The spot price of ITC is Related Articles. The offers that appear in this table are from partnerships from which Investopedia receives compensation. When buying the stock, the interest that could be earned with the money used to buy the stock is forfeited for the duration of the stock ownership. Because futures contracts can be used to hedge positions in the underlying asset, a perfectly hedged position must necessarily yield the risk-free rate of return — otherwise, arbitrage opportunities would arise that would conform the rate of return to the risk-free rate of return. If the risk-free interest rate exceeds the dividend yield, then futures prices will be higher for contracts with a longer maturity. Even if the contract is closed out before the delivery date, these costs and benefits are taken into account in determining the price of the contract, since there may be a delivery.
Example: Futures Market Arbitrage Opportunity If Spot-Futures Parity Violated
Through these two examples we see how a trader can benefit if there is a price difference in the spot and futures market. The parity relation must also hold for longer contract periods. Calculate margin. Clearly, the stock is trading at a discount to its fair value, which has been calculated through the mathematical formula and which had come up to Fair value can show the difference between the futures price and what it would cost to own all stocks in that index. Related Articles. Benefits that accrue with ownership include dividends and interest that is paid by the underlying asset. Therefore, the determinants of the value of either type of contract is the same, so the following discussion will focus on futures. How can a trader benefit in such a scenario? Uncleared margin rules. Fair Value vs. Market Data Home. Education Home. Applying this formula to a stock:. The parity relationship is also known as the cost-of-carry relationship because it asserts that the futures price is determined by the relative costs of buying a stock with deferred delivery in the futures market versus buying it in the spot market with immediate delivery and carrying it as inventory. Similarly, we could determine the future price for the mid month and far month contracts.
Delaying delivery from t 1 to t 2 allows the earning of risk-free interest during that time interval, macd cross butler amibroker automation it also entails the loss of the dividend yield during that time period, hence the equation. When a contract is 1 st entered into, the price of a futures contract is determined by the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued during the time until settlement. But if a ichimoku m15 settings thinkorswim contact number canada gap is witnessed due to supply demand imbalances, an arbitrage opportunity arises. Therefore, the futures price for April delivery, which is 3 months latershould be:. Costs associated with ownership include storage costs, such as with oil, and the interest rate used to determine the present value of a transaction, which represents the opportunity cost of delaying the transaction. This equation is like the spot-futures parity equation, except forex profit boost indicator momentum day trading indicators the price of the futures contract of shorter maturity is substituted for the current spot price. Note this futures contract is hypothetical since there is no contract for just 1 share of an ETF or stock, but it simplifies the math while still illustrating the principle. Financial Ratios. Although the net initial investment is 0, the future cash flow in 1 year is a riskless positive number which is exactly equal to the mispricing of the futures contract compared to what it would how to calculate return on a stock given dividend payment why trade oil futures at parity. Because higher interest rates favors the long position, futures traders are willing to accept a higher price on the futures contract, while a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. Explore historical market data straight from the top cannabis stocks ameritrade self directed roth ira to help refine your trading strategies. According to the formula there should ideally be only a Rs5 difference between the spot and future price. If the underlying asset pays no dividends, such as a trade simulation games android etoro chat support like silver, then the dividend is simply set equal to 0, so the price of the futures contract would be equal to asset price multiplied by the risk-free interest rate. Article Sources. A futures contract is nothing more than a standardized forwards contract. Education Home. So, for instance, you can read it on your phone without an Internet connection. Access real-time data, charts, analytics and news from anywhere at anytime. CME Group is the world's leading and most diverse derivatives marketplace. Fair value can show the difference between the futures price and what it would cost to own all stocks in that index. The fair value and futures price will fluctuate during the course of the trading day. The parity relationship is also known as the cost-of-carry relationship because it asserts that the married couple exploring trading or swinging porn pelatihan trading forex price is determined by the relative costs of buying a stock with deferred delivery in the futures market versus buying it in the spot market with immediate delivery and carrying it as inventory. These include white papers, government data, original reporting, and interviews with industry experts.
Back to Chapter List Previous Chapter. However, since the covariance between futures prices and interest rates is low, the price differential between forwards and futures is negligible, except for futures contracts on long-term fixed income securities, since their value is highly dependent on interest rates, thus causing a substantial spread between forwards and futures prices. Price - Fair Value of Futures The fair value can provide a glimpse of overall market sentiment. The offers that appear in this table are from partnerships from which Investopedia receives compensation. An arbitrage is known as simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. Your Practice. Markets Home. Evaluate your margin requirements using our interactive margin calculator. The spot-futures parity equation can also be applied to other futures contracts with different underlying assets by making the appropriate modifications. Popular Courses. This book is composed of all of the articles on economics on this website. These include white papers, government data, original reporting, and interviews with industry experts. If the risk-free interest rate exceeds the dividend yield, then futures prices will be higher for contracts with a longer maturity. A futures contract is nothing more than a standardized forwards contract. It is a mathematical expression to equate the underlying price and its corresponding futures price. However, dividend payments may be received. The price of a futures contract is determined by the spot price of the underlying asset, adjusted for time and dividend accrued till the expiry of the contract. While it is said to be trading at a discount if the futures price is less vs.
I Accept. Fair Value Calculation. An introductory textbook on Economicslavishly illustrated with full-color illustrations and diagrams, and concisely written for fastest comprehension. However, since the covariance between futures prices and interest rates is low, the price differential between forwards and futures is negligible, except for futures contracts on long-term fixed income securities, since their value is highly dependent on interest rates, thus causing a substantial spread between forwards and futures prices. Solving the above equation, we obtain the futures price of The advantage of the book over using the website is that there are no advertisements, and you can copy the book to all of your devices. Related Terms Enterprise Value — EV Enterprise value EV is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization. The fair value can provide a glimpse of overall market sentiment. Since both the dividend yield and the interest rate are annual yields, the time difference between 2 contracts is generally calculated as the number of months between the delivery dates divided by the 12 months of the year. The price of the futures contract and its underlying asset must necessarily converge on the expiry date. Financial Analysis. A large deviation between the two could result in an arbitrage opportunity assuming that the futures price will should i invest in stocks or 401k how to invest in etf mutual funds revert back to the fair value. The spread between the two is the maximum at the start of the series and tends to converge as the settlement date approaches. In this case, we will sell Infosys futures and purchase the same quantity of shares in the cash market, knowing that by the end of the series the price of the futures and spot will converge. August series expiry is on 30th i. Investopedia requires writers to use primary sources to support their work. Because higher interest rates favors the long position, futures traders are willing to accept a higher price on the futures contract, betterment vs wealthfront app is guggenheim funds selling etfs to invesco a good thing a negative correlation between futures prices and interest rates will favor the short position, causing the futures price to be less than the corresponding forward price. Fair value how to read forex factory news sbi smart trading demo pdf the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. A futures contract is nothing more than a standard forward contract.
Analysts and investors utilize the Merton model to understand the financial capability of a company. According to the formula there should ideally be only a Rs5 difference between the spot and future price. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. At the time of expiry, a reverse trade has to be executed, as we had seen in the cash and carry arbitrage. As the settlement date approaches, the prices of the futures contract and its underlying asset must necessarily converge, so that on the delivery or settlement date, the futures price will equal the spot price of the underlying asset. Fair value can show the difference between the futures price and what it would cost to own all stocks in that index. Education Home. Price - Fair Value of Futures Personal Finance. New to futures? The price of a futures contract is determined by the spot price of the underlying asset, adjusted for time and dividend accrued till the expiry of the contract. Investopedia requires writers to use primary sources to support their work. Your Practice. Similarly, if the stock indicator based on price action trading pursuits courses trading at discount in the futures market compared to its spot price, we can implement the reverse cash and carry arbitrage strategy. Forex envelope strategy cimb bank forex trading market data. The delivery price is the price agreed to in the contract.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. Once we have executed the trade at the expected price you have locked in the spread. Let us consider a practical example to understand the concept better. At the end of the year, the trader with a long position pays you the settlement price of the futures contract in exchange for your ETF, so if the futures contract was overpriced, then you can earn a riskless profit by the amount of the overpricing. Related Terms Enterprise Value — EV Enterprise value EV is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization. The income yield is subtracted because no income is earned without owning the underlying asset. Fair value is the sale price agreed upon by a willing buyer and seller. The fair value can provide a glimpse of overall market sentiment. Delaying delivery from t 1 to t 2 allows the earning of risk-free interest during that time interval, but it also entails the loss of the dividend yield during that time period, hence the equation. How can a trader benefit in such a scenario? However, with time, the position of the parties will change as a spot price of the underlier changes, with the gains by one party equal to loss of the other party.
Therefore, the futures price for April delivery, which is 3 months later , should be:. To summarize:. Evaluate your margin requirements using our interactive margin calculator. So, for instance, you can read it on your phone without an Internet connection. So irrespective of where the market goes by expiry, profit is guaranteed. When a futures contract is initially agreed to, the net present value of the transaction must be equal for both parties; otherwise, there would be no agreement. By taking the long position in the futures contract, the trader can earn the risk-free rate of interest with the money that would otherwise be used to buy the asset; ergo, the long position must agree to a higher price to compensate the short position for holding an asset that pays no interest or dividends. The fair value can provide a glimpse of overall market sentiment. Although margin must be posted, it is much less than the value of the contract, and margin can be in the form of Treasuries , which earn interest. When buying the stock, the interest that could be earned with the money used to buy the stock is forfeited for the duration of the stock ownership. When a contract is 1 st entered into, the price of a futures contract is determined by the spot price of the underlying asset, adjusted for time plus benefits and carrying costs accrued during the time until settlement. What Is Fair Value Fair value is the sale price agreed upon by a willing buyer and seller.