Converting Futures price to forward spot rates

Discussion in 'Index Futures' started by demonet, Mar 15, 2004.

  1. demonet


    Does anyone know how to convert the price of a futures contract in a currency (I'm trading Euro FX), to the equivalent forward spot rate, or vice versa?

    I know the CME has some web application that displays this, but I do not quite understand what it is showing.

    What I would like to do is convert the Euro futures price to the spot price, or convert Euro forward rates (i.e. the spot rate, the 1 month, 2 month, 3 month rates, or any combination thereof) and convert this to the futures price so I can check for changes/differences.

    Thanks for your help in advance!!

  2. A forward contract is a private contract that is an "over the counter" contract between counterparties. it is private.
    In contrast, a futures contract is a publicly traded contract (traded on an exchange).
    The relationship between the spot and the futures/forward is determined by the difference in the interest rates earned on the respective currencies in a pair (net cost of carry).
    In general, the forward and futures (both) should trade at a net discount to the spot for the currency with a positive rate differential.
    For example, the GBP/USD will trade at a discount to the GBP/USD spot IF the GBP base interest rate is 5% and the USD is 1.25%
    Conversely the USD/GPB futures will trade at a discount to the USD/GPB spot.
    Both the future and forward rate will converge toward the spot as the position moves toward expiry and the net cost of carry moves toward zero.
    For more info on this subject, try
    Hope this is of some help. Best Regards, Steve46

    P.S. also try for a calculator that does the translation automatically.
  3. demonet


    Since the cost of carry is the only difference between a current spot rate (not a forward) and the futures contract, will the current spot rate be a influential factor in determining the June or Septmeber contract futures price? Or is it the other way around?

    If the spot rate does influence the futures price, how much of a part in the futures price does it play?

    In other words, I am looking for an index that might lead a particular currency futures contract....

    Thank you.
  4. Don't expect to find the magic "leading" indicator that you just follow to profits. It's never that simple.

    At times the trading action in the underlying commodity will drive pricing and at other times the trading action in the futures controls will drive it. But because there's a arbitraged relationship whichever is in control at the given moment will move the related instrument. Only way to try to tell which one's doing the driving at the moment is to watch both (or all three in the case of the major indices) instruments vis a vis respective support and resistance and follow the detailed trade activity (if details are available).

    That's easier for equity indices because you can watch the SPX, SPY, and ES simultaneously and gauge not just their price curves but also the trade activity. More one-sided with currency futures, but the analog is consistent.

    Note that while the "fair price" formulas for futures are basically just spot price plus cost to carry - prices will float in a band around the moving fair price throughout the day depending on trading dynamics and arbitrage programs will kick in at the upper and lower extremes of that float.