Futures Fair Value Calculator

The cost-of-carry model prices futures contracts based on the idea that the futures price must equal the spot price plus all costs of holding the physical asset (financing, storage, insurance) minus any benefits (dividends, convenience yield) over the life of the contract. If futures were priced differently, riskless arbitrage profits would be available by simultaneously trading futures and the underlying spot. Competition among arbitrageurs enforces this pricing relationship in liquid markets with low transaction costs.

The basis is the difference between the spot price and the futures price (or sometimes futures minus spot, depending on convention). For financial futures, the basis converges to zero at expiration — cash and futures prices must be equal at delivery. The basis also reflects market sentiment: in commodity markets, a widening basis (futures rising relative to spot) indicates improving forward demand, while narrowing basis signals near-term physical tightness. Basis risk — the uncertainty about the basis at the time a hedge is closed — is a key remaining risk for hedgers using futures.

As a futures contract approaches its expiration date, the futures price must converge to the spot price because at expiration, the futures buyer takes delivery (or cash settles) at the futures price and must receive goods worth the spot price. If futures were above spot at expiration, everyone would sell futures and buy spot for delivery, forcing prices together. This guaranteed convergence makes futures an effective hedging instrument: hedgers know their hedge will function perfectly at expiration even if the basis fluctuates during the hedge period.

Roll return is the gain or loss experienced when a near-month futures contract is sold and a further-dated contract is bought to maintain continuous exposure (rolling). In a contango market, the far contract is more expensive than the near contract, generating a negative roll yield as investors buy high and sell low repeatedly. In backwardation, the opposite occurs — investors sell the expensive near contract and buy the cheaper far contract, earning a positive roll yield. The roll return significantly affects long-term commodity investment returns: S&P GSCI commodity index loses approximately 3-5% annually to negative roll in normal contango markets.

The convenience yield represents the implicit benefit of holding physical inventory — the ability to maintain production continuity, respond to demand spikes, and avoid costly shutdowns. A high convenience yield occurs when physical supplies are scarce relative to demand, as holders of inventory command a premium for providing liquidity to the market. High convenience yields drive commodity futures into backwardation (futures below spot). For oil, the convenience yield fluctuates with inventory levels and geopolitical supply risks.

Most financial futures (equity index, interest rate) settle in cash — the gain or loss versus the initial futures price is paid in cash at expiration, with no physical delivery of the underlying. Commodity futures can settle either by physical delivery (the holder of a long position at expiration receives actual barrels of oil, bushels of wheat, or ounces of gold) or by cash settlement (for some contracts like VIX, natural gas, or certain agricultural contracts). Physical delivery creates logistical obligations that most financial investors avoid by rolling or offsetting positions before expiration.

Unlike forward contracts, exchange-traded futures are marked to market daily — gains and losses are settled in cash every business day. If your futures position loses value, you receive a margin call requiring you to deposit additional variation margin by the next morning. If it gains, excess margin is returned. This daily settlement eliminates accumulated credit risk between counterparties — neither party can accumulate large unrealized losses that they might be unable to pay. The exchange's clearinghouse stands between all buyers and sellers, guaranteeing contract performance.