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Futures pricing

yasaswi gomes (My grammar is 💯 good I)   (6591 Points)

19 October 2021  

Hi,

Everyone knows futures closing price is set by the board. This means, pricing futures obviously. Now, one of the pricing methods is Costs to carry method where all the costs related to underlying asset is added presumably to the closing futures price if they make a pricing policy change. This will lead to contago pricing which will increase basis risk to negative and futures price. Due to this the margin maintenance will increase, resulting in a loss.

Why would the committee use Cost to carry method when market participants will get into loss making contract? 

What is the rational behind this? Any hedging ratio needed to prevent loss from this futures pricing strategy?

Txs.


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