The excess of one futures contract price over that of another, or over the cash market price. Or, The amount agreed upon between the purchaser and seller for the purchase or sale of a futures option. Remember that purchasers pay the premium and sellers (writers) receive the premium.
If the futures is trading higher than the spot, which mathematically speaking is the natural order of things, then the futures market is said to be at ‘premium’. While ‘Premium’ is a term used in the Equity derivatives markets, the commodity derivatives market prefer to refer to the same phenomenon as ‘Contango’. However, both contango and premium refer to the same fact – The Futures are trading higher than the Spot.
If you have a futures position and if you fail to square off the position by expiry, then the exchange will square off the position automatically and it will be settled at the spot price as both futures and spot converges on the day of the expiry Not always does the futures trade richer than the spot. There could be instances – mainly owing to short term demand and supply imbalances where the futures would trade cheaper than its corresponding spot. This situation is when the futures is said to be trading at a discount to the spot. In the commodities world, the same situation is referred to as the “backwardation”. Acquire live chat enable