Why Futures Are Quoted at Their Delivery Price
Summary
The document explains why futures are commonly quoted by their settlement or delivery price rather than by the contract’s present value. It places this convention alongside other market practices, such as quoting bonds by yield and options by implied volatility, where the quoted variable supports comparison and communicates market conditions. For futures, the quote is the price at which the contract has zero present value when initiated.
This convention makes changes in a futures quote directly useful for calculating daily profit and loss using the contract’s point value. The futures term structure also reveals contango or backwardation and can be compared with spot prices in a cost-of-carry analysis. Daily settlement helps explain the convention: gains and losses move through the margin account, effectively resetting the contract at each settlement. The answer distinguishes futures from forwards, whose value includes discounting because they settle at maturity. It is a conceptual explanation, not a derivation for every contract or market.
Key ideas
- A futures quote is the delivery price that gives a newly initiated contract zero present value.
- Daily profit and loss can be calculated from changes in the futures quote and the contract’s point value.
- The term structure of futures quotes indicates contango or backwardation.
- Comparing futures quotes with spot can help assess cost-of-carry opportunities.
- Daily settlement distinguishes futures valuation from the discounting applied to forwards.
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Full text
# Why do futures seem to be quoted in setllement price rather than cost of the contract?
# Why do futures seem to be quoted in setllement price rather than cost of the contract?
- What I would expect to see is the price of contract quoted: $$p = \frac{F-E(S)}{k}$$ where $F$ is the settlement price, $E(S)$ is the expectation for the price at expiry (often assumed to be just = to current spot) and $k$ is the discount factor.
- However looking at CME (GBPUSD FX and Corn Futures) both seem to be quoted in settlement price rather than contract price.
- For options, as I would expect I am seeing contract price quotes (or calls); so why are futures quoted differently?
## Answer by Chris Taylor (score 3, accepted)
https://quant.stackexchange.com/a/49266
Separating the quoting convention of an instrument from its economic value is quite common in finance, as it allows easy comparisons between instruments (even across asset classes). Some examples are
- Bonds quoted as yield
- Interest rate swaps quoted as par rate
- Credit default swaps quoted as par spread
- Options quoted as implied volatility
- FX forwards quoted as forward points
And as you have noticed, futures are quoted as the strike which would give the contract zero present value. This has several advantages,
- The P&L is still easily computed as $PV\times(F_{t+1}-F_t)$, where PV is the point value
- Looking at the term structure of futures prices immediately tells you whether the market is in contango or backwardation
- It allows an easy comparison with the spot price (so if you know your cost of carry, you can tell whether a spot vs futures transaction will be profitable)
- It works well with the way that futures P&L is settled - each day your P&L is added to or removed from your margin account, so in effect you are entering a new futures contract each day, with the strike reset at the settlement price.
Note that since futures are settled daily (unlike forwards which are settled at maturity) the fair value of the contract is just $E(S)-F$, with no discounting like there is for a forward.
## Answer by A.L. Verminburger (score 0)
https://quant.stackexchange.com/a/50627
The way I find helpful to think about this is that exchanges are mechanisms of information discovery (the quote that is formed signals agreement between the two parties). In a futures exchange (which I believe is primary only) the key information that is being discovered is (... drumroll ...) future (...) price of a particular commodity / financial instrument. In a bond market (primary, OTC) the goal for the parties is to agree upon yield-to-maturity; hence we see them being quoted (quotes for different 10-yr treasuries are common).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.