how is a futures price calculated

A stock future’s fair price is the spot price plus the cost of carry — essentially the interest on the money you did not spend buying the stock, less any dividend expected before expiry. It is not a prediction of where the stock will go; it is what it should cost to defer buying the asset until the contract’s expiry. The formula anchors the future to spot, which is why the two move together.

what is the basis in futures

The basis is the difference between the futures price and the spot price of the same asset. A positive basis, where the future trades above spot, is normal for stock futures because of the cost of carry. The basis narrows as expiry approaches and reaches zero at expiry, when the future and the spot must converge to the same price.

difference between contango and backwardation

Contango is when the futures price is above the spot price, the usual state for stock index and stock futures because of the cost of carry. Backwardation is the reverse — the future trades below spot — which for stocks often signals heavy expected dividends, borrowing demand to short, or acute selling pressure in the futures. The labels simply describe which way the basis points.

why do futures and spot prices converge at expiry

Because at expiry the future becomes the spot — settlement is against the actual underlying price, so any gap would be a risk-free profit for arbitrageurs who would trade it away. As the days of carry remaining shrink to zero, the cost of carry that justified the gap shrinks with them. By the settlement moment the basis is zero and the two prices are the same.

the difference between futures price and spot price is called

The basis. It reflects mainly the cost of carry — the financing cost of holding the position to expiry, net of expected dividends — and it decays towards zero as expiry nears. Traders watch the basis both as an arbitrage signal and as a read on demand: an unusually wide or negative basis says something about financing, dividends or sentiment in that specific contract.

Futures pricing and the basis · Market Vidyalaya

A futures price looks like a forecast — “the market thinks NIFTY will be here next month” — and that reading is almost entirely wrong. A future is priced by arithmetic, tethered to today’s spot price by the cost of carrying the position to expiry. Once you see the tether, the whole vocabulary of contango, backwardation and the basis stops being jargon and becomes obvious.

Think of it like this

Ghar ka token aaj, possession baad mein

You agree today to buy a flat at possession three months from now. The builder charges a little more than today’s price — not because he predicts the flat will rise, but because your money stays with you earning interest for three months while he holds the flat. The premium is the cost of waiting, not a forecast.

In the market

A future is that deferred deal. The price is spot plus the cost of carrying the position to expiry, minus any dividend you would have received. It is the arithmetic of waiting, not a prediction.

The cost of carry, made concrete

Futures fair price ≈ Spot × (1 + r × t) − Dividends expected before expiry

Spot: The current price of the underlying
r: The financing / interest rate, annualised
t: Time to expiry, as a fraction of a year
Dividends: Any dividend expected before the contract expires

Example: The interest term is what you earn by not spending on the stock today; the dividend term is what you forgo by not owning it. A big expected dividend can pull the fair future below spot.

Worked example

Fair value of a one-month future

A stock at ₹1,000, one month to expiry

Spot price₹1,000

Financing rateThe carry you save by not buying now≈ 8% a year

Carry for one month₹1,000 × 8% × 1/12≈ ₹6.67

Dividend expected before expiryNone this cycle₹0

Fair futures priceSpot plus carry, no dividend to subtract≈ ₹1,006.67

The future trades a little above spot — a positive basis of about ₹6.67 — purely because of one month’s financing cost. Nobody forecast a rise. If a ₹15 dividend were expected before expiry, the fair future would instead sit below spot, because owning the stock would have paid you that dividend and the future does not.

Contango, backwardation and what they signal

State	Future vs spot	What it usually reflects
Contango	Future above spot	Normal cost of carry — the default for stock futures
Backwardation	Future below spot	Heavy expected dividend, short-selling demand, or acute selling
Basis narrowing	Gap shrinking	Expiry approaching; carry remaining is falling
Basis at zero	Future = spot	At expiry — the two must converge

Why this matters before you trade a future

A future embeds leverage: you control the full value of the contract for a fraction of it as margin. That cuts both ways with brutal symmetry, and the cost of carry you are implicitly paying or receiving is part of the return you must beat. Rolling a position from one expiry to the next means paying the basis again. None of this is a reason never to use futures — it is the reason to price what you are actually being charged before deciding the trade is worth it.

Check yourself

A stock trades at ₹500 spot. Its one-month future trades at ₹497, and a large dividend is due before expiry. What best explains the future being below spot?

What to remember

A futures price is spot plus the cost of carry, minus expected dividends — arithmetic, not a forecast.
The basis is the future-minus-spot gap; it decays to zero and the two converge at expiry.
Contango (future above spot) is normal; backwardation often signals dividends, shorting demand or selling.
Convergence at expiry is a certainty because settlement is against the underlying, closing any arbitrage.
Futures embed leverage and an implicit carry cost — price what you are being charged before you trade.

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Common questions

Short, direct answers to what people ask about this topic.

how is a futures price calculated: A stock future’s fair price is the spot price plus the cost of carry — essentially the interest on the money you did not spend buying the stock, less any dividend expected before expiry. It is not a prediction of where the stock will go; it is what it should cost to defer buying the asset until the contract’s expiry. The formula anchors the future to spot, which is why the two move together.
what is the basis in futures: The basis is the difference between the futures price and the spot price of the same asset. A positive basis, where the future trades above spot, is normal for stock futures because of the cost of carry. The basis narrows as expiry approaches and reaches zero at expiry, when the future and the spot must converge to the same price.
difference between contango and backwardation: Contango is when the futures price is above the spot price, the usual state for stock index and stock futures because of the cost of carry. Backwardation is the reverse — the future trades below spot — which for stocks often signals heavy expected dividends, borrowing demand to short, or acute selling pressure in the futures. The labels simply describe which way the basis points.
why do futures and spot prices converge at expiry: Because at expiry the future becomes the spot — settlement is against the actual underlying price, so any gap would be a risk-free profit for arbitrageurs who would trade it away. As the days of carry remaining shrink to zero, the cost of carry that justified the gap shrinks with them. By the settlement moment the basis is zero and the two prices are the same.
the difference between futures price and spot price is called: The basis. It reflects mainly the cost of carry — the financing cost of holding the position to expiry, net of expected dividends — and it decays towards zero as expiry nears. Traders watch the basis both as an arbitrage signal and as a read on demand: an unusually wide or negative basis says something about financing, dividends or sentiment in that specific contract.