Futures trading at discount
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Brent physical oil benchmark at record $10 discount to futures
Note : All information provided in the article is for educational purpose only. They don't constitute any professional advice or service. Tel No: Registration Nos. Motilal Oswal Wealth Management Ltd. Motilal Oswal Financial Services Ltd. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market are subject to market risk, read all the related documents carefully before investing.
Website: www. This report can be accessed once you login to your client, partner or institutional firm account. Home Article. The Net Asset Value NAV is usually used in mutual fund for describing the value of funds of assets and less the value of liabilities. It is also referred to as net book value or book value and the term may also be used in many places with different meanings.
Net asset value is mostly used in mutual fund to signify total value of the portfolio of the fund, less its liabilities. The net asset value per share for mutual fund is daily calculated in the closing market price reflecting the value change. In the case of stocks, the NAV is the value of the assets over the liabilities divided by the number of stocks issued.
One would think that the NAV is the price at which a stock should be trading in the stock market. However, it barely ever happens in reality. In reality many factors impact the final price of the stock, making it available in premium or in discount of its Net Asset Value. When people refer to stocks being traded in premium or in discount, this is the context they use it in. At the risk of sounding repetitive, futures trading is not for everyone.
The futures market holds a lot of opportunities however, before embarking into it make sure you get an expert broker to guide you through the entire process. The spot price is the current price of a spot price contract, at which a particular commodity could be bought or sold at a specified place for immediate delivery and payment on a spot date. Conversely, a commodity's futures price is quoted for a financial transaction that will occur on a future date and is the settlement price of the futures contract.
What is the difference? The main differences between commodity spot and futures prices are the delivery dates and prices. A commodity's spot price is the price at which the commodity could be traded at any given time in the marketplace. In contrast, a commodity's futures price is the price of the commodity in relation to its current spot price, time until delivery, risk-free interest rate and storage costs at a future date.
Calculate commodity futures prices by adding storage costs to the spot price of a particular commodity. Multiply the resulting value by Euler's number raised to the risk-free interest rate multiplied by the time to maturity. Generally, futures prices and spot prices are different because the market is always forward-looking. The difference in a commodity's spot price and future price is due to the cost of carry and interest rates.
Factors influencing premium and discount in the stock market: Market Sentiment of Stock Market - The sentiment prevalent in the market is one of the most intangible and difficult to measure factors that often drive a stock price to the bottom or to the top. A single piece of relevant news can disproportionately affect the fortunes of a stock in the market because in a mob, individuals tend to follow the crowd and hence overreact. This can lead to a premium when the news is somewhat good but the sentiment it generates is extraordinary.
It can lead to a discount when the news is somewhat bad but the sentiment it generates is debilitating. Inflation in Share Market - During highly inflationary times, stocks tend to get disproportionately discounted as the disposable income generally in the economy lowers and the pricing for investments suffers.
Conversely, during deflationary times, stocks tend to get disproportionate amounts of premium because investments are seen as attractive and hence demanded more. Economic strength of the industry - Companies belonging to the same industry or sector generally tend to rise or fall together. This is because several factors such as regulation, substitute industries, etc. Substitutes of Stock Market - Availability of viable substitutes, in other markets such as commodities, debt, real estate, bullion, etc.
Like in any other situation, availability of good alternatives will discount the stocks and lack of them will add the sheen of premium to them. Demographics in Stock Market - In an economy, the larger the proportion of people belonging to the middle age category, in their peak earning period, the higher the likelihood of shares being traded at a premium.
If however there are a larger proportion of people in the younger or older age groups, the stocks will be discounted. It is significant to understand here that for an economy, the middle aged are important for the immediate future and the young are important for the long term.
Trends in Stock Markets - There are phases due to international cues or big stories when say, there is an ecommerce boom, and suddenly those stocks will be at a premium.
Trends are fickle and unreliable. It needs a very good understanding of behavioural economics to benefit from them. Liquidity in Stock Market - Liquidity is one of those invisible factors that can easily be ignored by the retail investor who isn 't paying attention.
Among the many macroeconomic cues that give an insight into the market, liquidity is perhaps most important. With lack of substitutes to invest in and low spend on consumption, sometimes the economy is left with heavy surplus cash at one end and funds-hungry companies on the other. In such a situation there is an influx of cash in the stock market leading to the stocks being traded on discount.
Now with the knowledge that the implications of the premium and discounted stock prices can have on your portfolio, you can now tread carefully while investing in mutual funds. Other Popular Articles Understanding equity risk premium and impact on valuations Using stock futures as a proxy for borrowing How to use stock futures for long term investing in stocks?
Why do dividends impact the price of stock futures? FB Comments Other Comments. Submit Your Comments. Read More Discover top 5 reasons to invest your money with blue chip companies Blue chip companies are reputed and well-established companies that are lis Read More We all know that a call option is a right to buy and a put option is a righ Read More Click to Register. Datsons Labs Ltd. Stock Directory. Mutual Fund Directory.
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Meanwhile, futures contracts are trading below the spot price. A futures contract is an agreement between two parties to buy or sell a something at a future specified price and date, allowing for investors to hedge or speculate on the performance of the underlying asset. Hence, BTC futures trading at a discount to spot price also known as market inversion is a clear indication that the participants are still bearish. So, it could be argued that the bear market is alive and kicking.
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What is Premium and Discount in Futures Market?
Stock Futures , Generally trade at premium to spot prices of the underlying. Backwardation or contango may happen in the following scenario. Presently i. This typically happens when a company is expected to give dividend. After paying the dividend, the share usually trades at a lower value ex dividend.
How to Use Index Futures
A stable government, GST ushering in a common market across the nation, steady inflow into equities from domestic institutions which have even made up for inconsistent FII flows, much-awaited proposals for the strengthening of the banking sector, and a slew of other measures, that could all possibly be a growth multiplier. Index at 50,? No problem, sir. While there is no dearth of such targets, a parallel market, by way of the futures and options segment traded on the same platform, bets on the same daily, albeit in a different way. Why their bets assume importance is that it attracts a stream of investors that is by and largely different from the regular stock investor. Lower margin attracts more money, which means more money is at stake. Such interplay of risk, volatility, and short trading horizon shows itself in the market in peculiar ways. Contango is a situation in which the cash price is at a discount to the future price.
Futures prices and spot prices. Futures markets provide a public forum to enable producers, consumers, dealers and speculators to exchange offers and bids until a price is reached which balances the day's supply and demand.
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Nifty futures trading at discount: How large investors make riskless profits from such situations
If you are a regular follower of our site, you would be introduced to the basic concept of futures and options market at the beginning. This article will help newbies in understanding the premium and discount in futures market. In order to understand the concept, you must be aware of the difference between the spot and future market. The spot price reflects the immediate settlement of security while futures prices delay the payment and delivery to predetermined future dates. Now, come to the most commonly used market terminology — Discount and the Premium. So, both contango and premium indicate the same fact, the futures are trading higher than the spot. On the other hand, Discount is when the spot price exceeds the futures price. The situation is also referred to as backwardation in the commodity derivative market while equity derivative market refers to it as Discount. When the futures price is to converge with the spot price, the situation is considered as normal. Suppose currently Nifty is trading at and Nifty futures is trading at Now, if the situation is Nifty is trading at and Nifty futures is trading at These are some of the basic concepts regarding futures Premium and Discount market strategy. This site uses Akismet to reduce spam. Learn how your comment data is processed.
Do you know when Nifty Futures trades at a premium or discount and what does it mean?
A stock index futures contract binds two parties to an agreed value for the underlying index at a specified future date. However, many futures contracts are closed well before the expiration. Although index futures are closely correlated to the underlying index, they are not identical. An investor in index futures does not receive if long or owe if short dividends on the stocks in the index, unlike an investor who buys the component stocks or an exchange-traded fund that tracks the index. The index futures price must equal the underlying index value only at expiration. When interest rates are low, the dividend adjustment outweighs the financing cost, so fair value for index futures is typically lower than the index value. Whenever the index futures price moves away from fair value, it creates a trading opportunity called index arbitrage. As soon as the index futures' price premium, or discount to fair value, covers their transaction costs clearing, settlement, commissions, and expected market impact plus a small profit margin, the computers jump in, either selling index futures and buying the underlying stocks if futures trade at a premium , or the reverse if futures trade at a discount. Index arbitrage keeps the index futures price close to fair value, but only when both index futures and the underlying stocks are trading at the same time.
