The value of futures contract is rather different from the value of an otherwise identical forward contract because of the pay off from a futures contract is realized at the end of every trading day. The value of forward, recall, is generally realized at the end of the contracts term. So at any time, a futures contact value is driven solely by how much its futures price has changed since yesterday (Last working day - Prev. Closure). The value of futures, is thus, is the difference between the current futures price and the futures price at end of the previous trading day when everyone settled up.
Futures Value Long Example
Royal Mill buys wheat to buy to make wheat floor. In 6 months time Royal plan to buy 5000 bushels of wheat and they want to lock in a price now. Royal Mill executes 10 wheat futures contracts at the Commodity stock exchange with a delivery price $3.00. Each contract guarantees the delivery of 5000 bushels of wheat in 6 months for $3.00 per bushel. Say one day the futures contracts closed at $3.10 and by the middle of next day, the futures price was $3.20 per Bushel. What is the value of the position then ?
Futures Value Long Example
FuturesValueLONG = Number of contracts * Bushels per contract * (F NOW FYESTERDAY) = 10 * 5000 * (3.20 3.10) = $5000 At the moment their futures position has a market value of $5000. This does not reflect, however the profits realized and collected previously. Recall the futures price was 3.00 when Royal Mill put on these contracts., so prior to now they would already collected $5000 using the same math.
To calculate the value of an existing futures contact, we
simply need to current futures price and the futures price from the previous day. The value is just the difference between the two. For position value we, need to know the no. of contracts involved and whether one is long or short. Flong = (FPnow FPPreviousClosure) * no. of contracts Fpnow is the Futures price calculated now, FP PeviousClosure is the futures price at the end of the prev. trading day. F long is the fair market value of one long futures contract righ tnow. Whether the value is +ve or _ve depends on whether the futures price has increased or decreased.
Futures Long example
Example : You are long 1000 corn futures. The current furures price is 2.82 per bushel . The futures price yesterdays close was 2.85. The Position has become negative value because the futures price is dropping; Flong = (Fpnow FPPrev.Closure) * no. of contracts. Flong = (2.82 2.85) * 1000 = -30,000
Futures Short The formula for a short futures position is only slightly different. Fshort = (FPPrev.closure Fpnow) * no. of contracts.