Future price is very important in derivatives segment and 99% traders don’t know the calculation of future price and its importance.
There is a common myth that if the future price is more than spot price then it implies the bullish sentiment and if the future price is less than spot price then it is bearish sentiment. However, it is totally wrong interpretation.
In layman terms, the spot price is the price of a stock in cash segment or current market price. The future price is the price of a stock/commodity/derivative at a future date normally the current expiry. By default, the future price is higher than the spot price. The difference is also called the cost of carry.
You can can calculate the future price by the following formula.
Future Price = Spot Price + Interest Payable – Dividend Payout. Under ideal condition, there is a perfect correlation between the future price and spot price.
One of the most commonly asked queries is whether we should refer to future price or spot price for the price discovery. The answer will depend on the no of active contracts. If the future price no of active contracts are more than it will act as a reference & it will react first and vice versa.
Future Price is a mix of sentiments and speculation. It is normally used to take advantage of low margin and arbitrage opportunity. You can carry forward your sell position in futures.
