Providers offer a diverse range of futures based contracts which settle at pre-determined future dates.
A futures contract is a contractual agreement to buy or sell a standard quantity of a particular commodity or financial instrument on a fixed future date at a price agreed today.
Some futures contracts call for physical delivery of an asset, while others are settled in cash. All spread bets are cash settled.
A futures bet quoted by a spread betting provider typically has a different price to the underlying market. For example, a Wall Street future may be priced at a higher level to the Wall Street Cash Index. This premium (or ‘discount’ if the futures price is lower than the cash price) is known as the Fair Value (FV) or the cost of carry.
To understand how spread betting providers structure their future and rolling index prices it is important to understand the concept of fair value. Fair value is the theoretical assumption of where a futures bet should be priced given such factors as the current index level, index dividends, the number of days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as short-term supply and demand will cause price fluctuations around fair value. Price discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value.
The following formula is used to calculate Fair Value (FV) for stock index futures:
FV= cash x [1+i (d/b)] – Implied Dividends
i = Applicable Financing Rate (LIBOR)
d= days to expiration
b = day basis (365 for UK, 360 for USA and other countries)
FV = current cash price + interest costs over the period – any
Example of calculating fair value:
Wall Street cash price: 13400
Financing Rate (US LIBOR): 5.5%
Implied Dividends: 70 points
Days to expiration: 80
= 13400 x (1 + (0.055*80/360)) – 70
This figure shows the fair futures price. By subtracting this figure to the cash price we can determine the Fair Value.
Fair Value = 13493.7 – 13400 = 93.7
How do spread betting providers calculate rolling indices?
Rolling indices are calculated using the following formula:
Rolling Price = Future Price – Fair Value
Providers use relevant fair values published by Bloomberg and Reuters to calculate rolling prices for all equity indices. Please note that rolling prices are not calculated from the cash price, but from the futures price.
Can I roll my positions on expiring contracts over to the next month/quarter?
Yes, providers can roll your positions for you if they receive a rollover instruction from you prior to the expiry date of the contract and you have sufficient funds in your account. You can do this by calling their desk or e-mailing them with your account number and exact instructions of the open position you want to roll. If you want the provider to automatically roll all of your positions in the future, then you can also request this by using the same contact details as above and specifying this. If you are unsure whether your position is going to be rolled over, please call the trading desk to confirm prior to the expiry of your position.
Please note: When any futures contract is rolled over to the next quarter, it creates a new contract and as such any orders associated with the previous contract will not apply. Orders on the new contract will have to be added manually by the client.
The spread betting provider also provides you with the facility to roll a bet prior to its expiry from one contract period to another at a preferential rate.
This is commonly referred to as a roll-over and avoids having to pay the full spread by closing your original trade and then opening a new position.
When rolling your position into a new contract period, the provider may simply close your existing position at, say, the mid-price of its current quote (different providers have different policies), thus realising any profit or loss in respect of that position, and open a new position for you in respect of the next contract period at the current price applicable to that contract period as it reflects current fair value.
On November 1th you bought £10 of the UK 100 Futures December (maturing on December 17th) at 4100 and have seen the market rise to 4300.
You have the ability to realise a profit in the region of £2,000 but have a feeling that the market will continue to rise.
The maturity of the contract you bought is next week but you do not wish to close your original position to realise your profit and then open a new position as this would incur paying the spread for both trades.
You therefore roll-over the contract with our dealers from December to March (maturing on March 17th).
The sale of the December contract is done using the usual spread, i.e. at 4298 if quoting 4298-4306.
The purchase of the March contract is done at the mid-point. You would pay 4302 on the March contract, even though it is quoting 4298-4306
By doing this, your new position remains open until March 17th and you can reassess the situation.