47 lines
4.0 KiB
Plaintext
47 lines
4.0 KiB
Plaintext
284
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A Complete Guide to the Futures mArket
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For the moment, ignore the last column in Table 18.1 and focus instead on the unadjusted con
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tinuous futures price (column 6). At the start of the period, the actual price and the unadjusted
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continuous futures price are identical. At the first rollover point, the forward contract (November
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2012) is trading at an 85
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cent discount to the nearby contract (July 2012). All subsequent prices of
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the November 2012 contract are then adjusted upward by this amount (the addition of a positive
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nearby/forward spread), yielding the unadjusted continuous futures prices shown in column 6. At
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the next rollover point, the forward contract (July 2013) is trading at an 86.25
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cent discount to the
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nearby contract (November 2012). As a result, all subsequent actual prices of the July 2013 contract
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must now be adjusted by the cumulative adjustment factor—the total of all rollover gaps up to that
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point (171.25 cents)—in order to avoid any artificial price gaps at the rollover point. This cumulative
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adjustment factor is indicated in column 5. The unadjusted continuous futures price is obtained by
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adding the cumulative adjustment factor to the actual price.
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The preceding process is continued until the current date is reached. At this point, the final cumu
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lative adjustment factor is subtracted from all the unadjusted continuous futures prices (column 6),
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a step that sets the current price of the series equal to the price of the current contract (November
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2014 in our example) without changing the shape of the series. This continuous futures price is indi
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cated in column 7 of Table 18.1. Note that although actual prices seem to imply a net price decline of
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329.50 cents during the surveyed period, the continuous futures price indicates a 443
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cent increase—
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the actual price change that would have been realized by a constant long futures position.
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In effect, the construction of the continuous series can be thought of as the mathematical equiva
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lent of taking a nearest futures chart, cutting out each individual contract series contained in the
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chart, and pasting the ends together (assuming a continuous series employing all contracts and using
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the same rollover dates as the nearest futures chart).
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In some markets, the spreads between nearby and forward contracts will range from premiums to
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discounts (e.g., cattle). However, in other markets, the spread differences will be unidirectional. For
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example, in the gold market, the forward month always trades at a premium to the nearby month.
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2 In
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these types of markets, the spreadadjusted continuous price series can become increasingly disparate
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from actual prices.
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It should be noted that when nearby premiums at contract rollovers tend to swamp nearby dis
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counts, it is entirely possible for the series to eventually include negative prices for some past periods
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as cumulative adjustments mount, as illustrated in the soybean continuous futures chart in Figure 18.1.
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The price gain that would have been realized by a continuously held futures position during this period
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2 The reason for this behavioral pattern in gold spreads is related to the fact that world gold inventories exceed
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annual usage by many multiples, perhaps even by as much as a hundredfold. Consequently, there can never ac
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tually be a “shortage” of gold—and a shortage of nearby supplies is the only reason why a storable commodity
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would reflect a premium for the nearby contract. (Typically, for storable commodities, the fact that the forward
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contracts embed carrying costs will result in these contracts trading at a premium to more nearby months.)
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gold prices fluctuate in response to shifting perceptions of gold’s value among buyers and sellers. Even when
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gold prices are at extremely lofty levels, it does not imply any actual shortage, but rather an upward shift in the
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market’s perception of gold’s value. Supplies of virtually any level are still available—at some price. This is not
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true for most commodities, in which there is a definite relevant limit in total supplies. |