What is the formula to determine Fair Future Price?
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Future Price work on the principal of continues compounding..
F(t) = S * e*r^(t)
where,
F(t) = Future Price
S = Spot price
e = Mathematical constant, exponential = 2.718
r = opportunity rate, in the Indian context take it as the 91 day RBI rate
t = time period, but make sure you use the proper day count convention.
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hi Karthik, for risk free interest rate do we consider 91 day RBI rate? or GOI bond rate ?
Praveen, the rates on GOI bonds are usually for a year or more…91 day day works as a better approximate.
Where does FFP comes into play?
Helps when you want to exploit arbitrage opportunities.