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Futures Pricing, Upfront Value, and Synthetic Forward Positions

Article Quant Q&A · Author: M Smith
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Summary

The document asks whether a trader can enter a futures position with a nonzero initial value by choosing a delivery price below the cost-of-carry level. One response describes a futures-options combination: buying a call and selling a put at the same strike can create an obligation to take a futures position at that strike. In the example, the initial payment is the present value of the difference between the futures price and strike, while exercise later offsets that amount through the futures position.

Another response says standard futures are structured with no initial cash flow, and discusses how standardized coupons can instead lead to an upfront payment in credit default swaps. Together, the answers distinguish a contract’s quoted terms from a synthetic position assembled using options. The example illustrates a retail-accessible options route in a margin account, but does not discuss transaction costs, margin risks, liquidity, or differences in contract conventions. The claims are explanatory responses, not a general treatment of every futures market.

Key ideas

  • A same-strike call and short put on futures can synthesize a futures position at that strike.
  • The example describes an initial payment tied to the present value of the strike difference.
  • The options exercise can create futures positions and reverse the initial payment effect.
  • The responses describe standard futures as having no initial cash flow.
  • The discussion omits transaction costs, margin risks, and market-specific contract details.

Tags

FuturesOptionsDerivatives pricing
Full text
# Is it possible to buy/sell a futures contract with a non-zero initial price?


# Is it possible to buy/sell a futures contract with a non-zero initial price?












At creation, the strike price $K$ of a futures contract is determined using the formula $$ K = S_0 e^{rT} $$ where $S_0$ is the price of the underlying asset at time $t=0$, $r$ is the risk-free interest rate, and $T$ is the time to maturity of the contract. Setting the strike price of the contract in this way ensures that it has a non-zero initial value.

My question is, in a real-world situation, is it possible for a domestic trader to sell am unfair futures contract with strike price $K < S_0 e^{rT}$ in exchange for an initial premium payable at time $t=0$?

## Answer by dm63 (score 1, accepted)

https://quant.stackexchange.com/a/39063

You can almost do it using futures options. For example , if a futures contract is trading at 97.00 you can simultaneously buy a 98.00 call and sell a 98.00 put expiring at the next available listed expiration date. Thus, you have promised to buy the futures contract for 98.00 on the expiration date. You will receive a payment of the present value of 1 point for doing this. However on the expiration date of the options you will pay back this 1 point because the options get exercised into futures contracts. A retail investor can actually do this in a margin account.

## Answer by phdstudent (score 0)

https://quant.stackexchange.com/a/39046

No. Arbitrage principles force those contracts to have zero cash-flows at inception. I have never heard of any type of future contracts that require cash-flows exchange at the inception. If there is any premium (for any reason such as liquidy, convenience yield) the discount rate will adjust. The only exception I know to this are CDS contracts which theoretically should have no cashflow exchange at inception as well. There are cases where cash exchanges hands when the contract is initiated but not exactly because there is a premium but because coupons are standardized.

You can read more about this issue in Augustin, Patrick, Subrahmanyam, M. G., Tang, D. Y. and Wang, Sarah Qian. (2014) . A quote from the book:

> The coupons are standardized, usually 100 or 500 basis points, the difference being settled as an upfront payment between the protection seller and the protection buyer

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.