Comment
Author: Admin | 2025-04-27
The latter affects the former. This relationship leads to the prices of the two moving in sync with each other, though there is a difference between the two. Calculating Bitcoin Futures The theoretical formula for calculating the futures price from the spot price is as follows: Futures Price=Spot price ∗(1+rf−d)\mathbf{\textbf{Futures Price}=\text{Spot price }^*(1+r_f-d)}Futures Price=Spot price ∗(1+rf−d) where, rf = risk-free rate on an annual basis, and d = dividend This formula needs customization for two points that are particular to Bitcoin. The first is the change for risk-free rate from an annual to a daily basis, and the second point refers to the fact that there is no dividend in cases of Bitcoin so ‘d’ can be removed. Bitcoin Futures Price=Bitcoin Spot price∗[1+rf∗(x365)]\begin{aligned}&\textbf{Bitcoin Futures Price}\\&\qquad\mathbf{=}\textbf{Bitcoin Spot price}\mathbf{^*\left[1+r^*_f\left(\frac{x}{365}\right)\right]}\end{aligned}Bitcoin Futures Price=Bitcoin Spot price∗[1+rf∗(365x)] where x = number of days to expiry The Cost of Carry The formula is based on the concept of cost of carry. Anyone with money investing in a futures contract can also invest it in secure bonds to earn the minimum available risk-free rate of return. Hence, the formula includes a provision for computing the returns, which are at least at par with the risk-free rate over time until the contract expires. If there is no chance of arbitrage, the futures price is the sum of the spot price and the cost of carry, which is reflected in the formula. Let’s verify this against recent historical values. With the risk-free rate value of 2.25%, Bitcoin's spot price of $8,171 as of April 18, 2018, the futures price expiring in April comes to around $8,175.30. This theoretically calculated value is very close to the actual price of $8,180 at which the contract was closed on that date. So how do we account for that slight difference of about $5? This is attributed to brokerage charges and the market perception of volatility, which could shift the real payout by a few points. Real-World Price Determination Beyond any theoretical calculations, the price of Bitcoin futures in the real world tends to run with wild swings in either direction. To understand the randomness in the price discovery mechanism of futures, let’s look at how prices of these futures contracts have behaved in the recent past: Image by Sabrina Jiang © Investopedia 2021 The graph above shows the price of Bitcoin in blue (the spot price), the price of futures contracts expiring in April in green, and the price of a Bitcoin futures contract expiring in May in red. We can make a few key observations from the information in the graph.: The price of futures may come close to the spot price (Arrow 1)The price of futures may jump higher than the
Add Comment