1.

How Future pricing take place?

Answer»

Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the fair value of a futures contract. Every time the observed price deviates from the fair value, arbitragers would enter into trades to capture the arbitrage profit. This in turn would push the futures price back to its fair value. 

The cost of carry model used for pricing futures is given below:

F = SerT

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