Price of a futures contract

CFA Level I Derivatives
#1

Hello everyone,

I have met this question in Schweser Notes:

The price of a forward or futures contract:

A. is typically zero at initiation

B. is equal to the spot price at expiration

C. remains the same over the term of the contract

The answer is C and the explanation for this is that price of a forward or futures contract refers to price specified in the contract.

For a forward contract, it can be understood. But for a futures contract, its price changes daily on the exchange. So if price of a futures contract refers to the price specified in the contract, then what is price changing on the exchange called?

Can anyone please help me answer this? Thank you.

#2

A future on wheat, for example, has a price of 65 today and the settlement date is in 30 days. That price remains constant until expiration of the future contract because we have agreed to buy/sell wheat in 30 days for 65. As you see, it is like a forward contract. The only difference is the daily compensation of value in the clearinghouse, but forget thar for now.

Suppose a 3 days have passed since we arranged our future above. What is the price of our future now? Yup, 65.

What is the price of a future on wheat of 30 days from now? Possibly not 65 anymore, but a different value because the market of wheat moves.

Have you realized the difference?

#3

Thank you for your reply,

Yes I know that the price specified in the contract remains unchanged. But I’m just wondering, what is the price on the exchange called? Isn’t it also price of the futures contract? And it changes daily.

#4

The _ price _ of a forward or futures contract is, by definition, the agreed price of the underlying at expiration. It doesn’t change.

The price on the exchange is called the _ market price _. It can change. And the forward contract is marked to market (at least) daily.

#5

I’m clear with your answer. But I feel like the book uses them interchangeably. Let me quote this sentence in the Notes:

‘Futures prices converge to spot prices as futures contracts approach expiration’

This ‘futures prices’ surely refer to market price not the futures prices as it stated. So the Notes uses them interchangeably, doesn’t it?

#6

Correct, it refers to market prices of futures.

I think the book uses the term “future price” without any differentiation because it is not ambiguous that the agreed price of a future does not change and the market prices of futures are the ones that constantly change.

#7

Yes, thank you very much.

#8

Note (pun almost not intended) that many prep providers use notoriously sloppy language.