Pricing Of A Futures Contract Using Python

Overview:

  • A futures contract is a financial derivative instrument. It helps in hedging against risks involved in another investment.
  • People who did trading in early days, to cover their risk against price fluctuations designed futures contracts. Futures are one of the most important financial derivatives today.
  • Example 1: A company that imports carbon steel plans to import 1 million tonnes of carbon steel at a price of $765 per ton. If the local currency depreciates against USD the company will be at a loss. To prevent this loss the company enters into a Foreign Exchange Futures Contract, which fixes dollar price to a specific price in local currency. This way, a company whose currency is not USD and imports metals from international market guards itself against the Forex losses.
  • Example 2: An investor buys 100 MSFT equity stocks at a price of $100 per stock. To prevent against the downward price movement of the stock the investor also buys a futures contract to sell MSFT at $120 per stock one month down the line. In case, if the stock price goes down, the future contract acts as a hedge and save the investor from the losses.
  • Remember, the stock price, which is called spot price, and the price of the futures contract will converge on the day of expiry of the futures contract.

 

Finding the value of a Futures Contract:

The formula to find the value of a futures contract is given by,

Formula to find out the price of a futures contract 

Spot Price: Spot Price of the Security

Benefits:     Benefits like dividends earned

Cost:           Financing Costs

r:                 Rate of interest

t:                 Time to expiry of the futures contract

 

Python example to find the value of an equity futures contract:

import math

 

# A python function that calculates the value of a futures contract

def FuturePrice(spotPrice, benefit, cost, r, t):

    return (spotPrice - benefit + cost)*math.pow(1 + r, t);

   

spotPrice       = 100;         

benefit         = 0;            # No dividend expected

miscCharges     = 1;

t               = 30;      

r               = 0.07;

ratePerday      = r/365;

 

contractPrice   = FuturePrice(spotPrice, benefit, miscCharges, r, t);

 

print("Spot price of the equity futures contract:%3.2f"%spotPrice);

print("Expected benefits like dividend:%3.2f"%benefit);

print("Expected costs to be incurred:%3.2f"%miscCharges);

print("Time to expiry of the futures contract in days:%d"%t);

print("Interest Rate in percent:%2.2f"%(r*100));

 

print("Price of the futures contract:%3.2f"%contractPrice)

 

Output:

Spot price of the equity futures contract:100.00

Expected benefits like dividend:0.00

Expected costs to be incurred:1.00

Time to expiry of the futures contract in days:30

Interest Rate in percent:7.00

Price of the futures contract:768.84

 


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