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Bitcoin spot vs future

It may seem odd that something can have two prices at once. But it's quite common in the world of commodities trading. Every commodity—a basic type of natural or agricultural goods in its natural form, like gold, oil, wheat, or beef—is priced in a couple of ways: its spot price and its futures price. Both the spot price and the futures price are quotes for a purchase contract—the agreed-upon cost of the commodity by the two parties, the buyer and the seller. What makes them different is the timing of the transaction and the delivery date of the commodity. One applies to a deal that's going to be executed immediately; the other, to a deal that's going to happen down the road—usually, a few months hence. A commodity's spot price is the current cost of that particular commodity, for current purchase, payment, and delivery. In commodity spot contracts, payment is required immediately, as is delivery. The deal is done "on the spot"—hence, the name "spot price." In a more general sense, a commodity's spot price represents the price at which the commodity is being traded at the current time in the marketplace. Traders and investors track the spot price of a commodity as they would stock prices. When people quote a commodity's price, as in "gold is trading at S,800 an ounce," it's the spot price they're usually referring to. The futures price applies to a transaction involving the commodity that will occur at a later date—literally, in the future. A commodity futures buyer is locking in a price in advance, for an upcoming delivery. A commodity's futures price is based on its current spot price, plus the cost of carry during the interim before delivery. Cost of carry refers to the price of storage of the commodity, which includes interest and insurance as well as other incidental expenses. Commodity futures prices can be calculated as follows: Add storage costs to the spot price of the commodity. Multiply the resulting value by Euler's number (2.718281828…) raised to the risk-free interest rate multiplied by the time to maturity. For example, assume the spot price of gold is S,200 per ounce and it costs per ounce to store the gold for six months. The six-month futures contract on gold, given a risk-free interest rate of 0.25%, is S,206.51, or ((S,200 )*e^(0.0025*0.5)). The basis is the difference between the local spot price of a deliverable commodity and the price of the futures contract for the earliest available date. "Local" is relevant here because futures prices reflect global prices for any commodity and are therefore a benchmark for local prices. The basis can vary greatly from one region to another based primarily on the costs of transporting the commodity to its delivery point. Basis is a crucial concept for portfolio managers and traders because this relationship between cash and futures prices affects the value of the contracts used in hedging. Basis is used by commodities traders to determine the best time to buy or sell a commodity. Traders buy or sell based on whether the basis is strengthening or weakening. The basis, it must be noted, is not necessarily accurate. There are typically gaps between spot and relative price until the expiry of the nearest contract. Product quality also can vary, making basis an imperfect indicator. The futures market exists because producers want the safety that comes with locking in a reasonable price in advance, while futures buyers are hoping that the market value of their purchase rises during the interim before delivery. The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. The futures price is an agreed-upon price in a contract (called a futures contract) between two parties for the sale and delivery of the asset at a specified time later on. A futures contract price is commonly determined using the spot price of a commodity—as the starting point, at least. Futures prices also reflect expected changes in supply and demand, the risk-free rate of return for the holder of the commodity, and the costs of storage and transportation (if the underlying asset is a commodity) until the futures contract matures and the transaction actually occurs. The spot price, aka the cash or market price, reflects what the commodity is trading in the current market or commodities exchange. It's what the commodity would cost you if you bought it today, for immediate delivery. Supply and demand play a big role in the spot price of commodities. The spot price in turn acts as the basis for the futures price. The outlook for supply and demand of the commodity, along with cost of storing it until it's sold, also influence the futures price. It may seem odd that something can have two prices at once. But it's quite common in the world of commodities trading. Every commodity—a basic type of natural or agricultural goods in its natural form, like gold, oil, wheat, or beef—is priced in a couple of ways: its spot price and its futures price. Both the spot price and the futures price are quotes for a purchase contract—the agreed-upon cost of the commodity by the two parties, the buyer and the seller. What makes them different is the timing of the transaction and the delivery date of the commodity. One applies to a deal that's going to be executed immediately; the other, to a deal that's going to happen down the road—usually, a few months hence. A commodity's spot price is the current cost of that particular commodity, for current purchase, payment, and delivery. In commodity spot contracts, payment is required immediately, as is delivery. The deal is done "on the spot"—hence, the name "spot price." In a more general sense, a commodity's spot price represents the price at which the commodity is being traded at the current time in the marketplace. Traders and investors track the spot price of a commodity as they would stock prices. When people quote a commodity's price, as in "gold is trading at S,800 an ounce," it's the spot price they're usually referring to. The futures price applies to a transaction involving the commodity that will occur at a later date—literally, in the future. A commodity futures buyer is locking in a price in advance, for an upcoming delivery. A commodity's futures price is based on its current spot price, plus the cost of carry during the interim before delivery. Cost of carry refers to the price of storage of the commodity, which includes interest and insurance as well as other incidental expenses. Commodity futures prices can be calculated as follows: Add storage costs to the spot price of the commodity. Multiply the resulting value by Euler's number (2.718281828…) raised to the risk-free interest rate multiplied by the time to maturity. For example, assume the spot price of gold is S,200 per ounce and it costs per ounce to store the gold for six months. The six-month futures contract on gold, given a risk-free interest rate of 0.25%, is S,206.51, or ((S,200 )*e^(0.0025*0.5)). The basis is the difference between the local spot price of a deliverable commodity and the price of the futures contract for the earliest available date. "Local" is relevant here because futures prices reflect global prices for any commodity and are therefore a benchmark for local prices. The basis can vary greatly from one region to another based primarily on the costs of transporting the commodity to its delivery point. Basis is a crucial concept for portfolio managers and traders because this relationship between cash and futures prices affects the value of the contracts used in hedging. Basis is used by commodities traders to determine the best time to buy or sell a commodity. Traders buy or sell based on whether the basis is strengthening or weakening. The basis, it must be noted, is not necessarily accurate. There are typically gaps between spot and relative price until the expiry of the nearest contract. Product quality also can vary, making basis an imperfect indicator. The futures market exists because producers want the safety that comes with locking in a reasonable price in advance, while futures buyers are hoping that the market value of their purchase rises during the interim before delivery. The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. The futures price is an agreed-upon price in a contract (called a futures contract) between two parties for the sale and delivery of the asset at a specified time later on. A futures contract price is commonly determined using the spot price of a commodity—as the starting point, at least. Futures prices also reflect expected changes in supply and demand, the risk-free rate of return for the holder of the commodity, and the costs of storage and transportation (if the underlying asset is a commodity) until the futures contract matures and the transaction actually occurs. The spot price, aka the cash or market price, reflects what the commodity is trading in the current market or commodities exchange. It's what the commodity would cost you if you bought it today, for immediate delivery. Supply and demand play a big role in the spot price of commodities. The spot price in turn acts as the basis for the futures price. The outlook for supply and demand of the commodity, along with cost of storing it until it's sold, also influence the futures price.

date: 02-May-2021 11:22next


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