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Pricing Patterns in Future Market

Instructor: Team Uplift

About the course

"Pricing Patterns in Future Market" explores the concept of basis, which is the price difference between an underlying asset and its corresponding futures contract. It discusses how basis can be utilized to effectively hedge price fluctuations and manage associated risks. The chapter introduces various market scenarios, such as normal markets where futures prices increase with time to maturity, inverted markets where futures prices decrease, and other patterns with varying price movements.

Cash settlement is explained for futures contracts that are settled in cash, where positions are marked to market and closed based on the underlying asset's spot price. The convergence of futures prices to spot prices is emphasized. The concept of basis is defined as the difference between the spot price and the futures price. The strengthening or weakening of the basis is determined by the relative movements of the spot price and futures price. Basis risk is discussed as the uncertainty associated with the basis when closing out a futures contract in a hedge.

It also touches upon cross hedging, which involves hedging an asset with a different underlying asset's futures contract. It provides insights into the impact of basis on net buying/selling prices and discusses basis risk in relation to hedging positions. The choice of futures contract and delivery month is explored, highlighting the need for correlation analysis and selecting a delivery month close to the hedge expiration while considering factors like price volatility and potential physical asset delivery.

"Price Pattern in Futures Market" provides a comprehensive understanding of basis, its relationship to spot and futures prices, and the implications for hedging strategies and basis risk management.



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