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Futures Pricing

In theory, the futures price should be equal to the cost of buying the shares and holding them until the delivery date when the futures expire. If the futures price is above this level, then you could make a guaranteed return by buying the underlying stock and selling the future. If the futures price is less than this level, then you could make a guaranteed return by buying the future and selling the stock. When a futures price moves away from the correct theoretical price, the markets will generally bring the prices back into line to prevent these “arbitrage” scenarios.[1]

[1] Arbitrage is the process whereby traders can take advantage of short-term pricing anomalies to make guaranteed profits on a trade. The markets will normally ensure that such anomalies are extremely short-lived.

The total cost of buying stock and holding it until the future’s expiration is made up of the following factors:


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