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# difference between spot and futures price

Discussion in 'Options' started by cloned777777, Aug 23, 2005.

1. ### cloned777777

For example, eur / usd is now trading @ 1.2238 ( spot )
and the future price at this other broker is now trading @ 1.2250
( eur currency futures)

what is the difference and what is the largest difference one has seen between the actual spot price and the futures price ?

10 pips, 100 pips ?

or am i not making sense at all ?

2. ### cloned777777

I guess what i am saying is

does the future price go up as the cash price goes up equaly..
and what is the maximum spread you have seen between the cash and the future price ?

eur / usd for example

3. ### scarletfire

The difference is due to the different interest rates. If you buy the euro spot, you will earn euro interest. The spot/future will converge at expiration.

4. ### cloned777777

thanx..

but my Q is,
if spot is now trading at 1.2239 , futures is 1.2249

and then tomorrow spot goes to 1.2259 , am i to expect the future price to go up 20 pips to 1.2269 ?

or it could go the opposite direction.

what is the relation ship to futures and cash ( spot price ? )

5. ### scarletfire

yes, for the most part, it will go up 20. it may change slightly, but it'll be bound tightly by arbs buying the spread 17 over and selling it 23 over.

er...

7. ### Chagi

I can't really comment on the largest difference, but as the previous poster mentioned, the difference between the future price and spot price is a function of time and interest rates.

I'm taking a risk management class this fall, where I will have the great pleasure of calculating this (partly) by hand. If I remember correctly though, both the domestic and foreign interest rates are factored into the calculation.

8. ### Chagi

Update, just got home from work and checked my "Investments" text (aka "the Finance Bible" hehe), here is the formula for the relationship between the forward (future) price and the current exchange price:

F = E[(1+Rdom/1+Rfor)^t]

Where:

F = forward price
E = current exchange rate price
Rdom = Domestic Interest Rate
Rfor = Foreign Interest Rate
t = time (in years)

By the way, I neglected to mention this in my previous post, but the above is based on something called the theory of Interest Rate Parity. If this were to be violated, an arbitrageur could theoretically make risk-free profits with zero net investments.

9. ### cloned777777

I am trying to figure out if the spread has or can get oOVER +/- 50 pips...

for eg spot=1.2230 futures=1.2290 in this case

or

spot=1.2290 futures=1.2230