Use Futures Prices to Measure Exposure Before Settlement

Summary

For a futures position, exposure should be measured using the contract’s own price, since changes in that price determine the position’s profit and loss and daily variation margin. The contract size multiplied by the futures price is therefore the relevant measure when targeting exposure while holding the contract.

Spot price can be relevant at final settlement, when the contract’s settlement price converges to spot. The document cautions that the published final settlement value may still differ from an observed spot price because settlement uses its own calculation method. It offers a concise distinction between exposure during the contract’s life and the value used at settlement, without discussing contract-specific adjustments or hedging details.

Key ideas

• A futures position’s ongoing profit and loss is driven by the futures contract price.
• Use contract size multiplied by futures price to target exposure in a held futures position.
• Spot price is relevant at final settlement, when the futures settlement price converges to spot.
• The final settlement value may differ from a quoted spot price because of how settlement is calculated.

Tags

# futures exposure targeting (spot vs futures price)


# futures exposure targeting (spot vs futures price)












I'm confused over if I should use spot or futures price when targeting a certain exposure. There are many websites that state you should use the contract size * futures price. Other websites, however, says to use contract size * spot price (i.e. using es futures price vs ^spx index price).

## Answer by ThatDataGuy (score 1)

https://quant.stackexchange.com/a/78269

If you enter into a futures contract, then your PnL exposure is to the price of that contract, because that is what determines the daily variation margin cashflows into your account.

Using contract size * spot price is only correct if you hold the futures contract until final settlement, when the final settlement price will equal spot. Even then, final settlement price and what you see as the spot market may not always be identical, due to different ways that final settlement prices are computed.

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