Forward Spread

  

Categories: Derivatives

The futures market involves prices for assets (commodities, currencies, stocks, etc.) at different points in time. The February price is different from the March price is different from the June price, and so on.

You can enter a contract to buy or sell the asset at some time in the future for a price you set now. The forward spread represents the difference between prices at two times.

So...you obtain a futures contract to purchase 500 barrels of oil at $75 a barrel two months from now. Oil is currently trading in the spot market at $73 a barrel. The forward spread is $2...the difference between the future price of $75 and the current price of $73.

Related or Semi-related Video

Finance: What is Spread To Treasuries?3 Views

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Finance allah shmoop what is spread to treasuries All right

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all right close that play bond magazine there people The

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answers are all right here Spread to treasuries is not

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a type of you know art photo but rather it's

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an indication of risk associated with a given debt or

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bond offering In the investing world Everything is calculated as

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some additional premium or additional cost or additional capital rental

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percentage all tact on to the safest investment in the

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world Things from the us treasury like t bills and

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bonds stuff like that from treasury We'll think about it

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like you're going to a restaurant looking at the dinner

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salad there for three bucks It's the cheapest thing on

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the menu if you wanted a steak Well that state

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costs fif eighteen dollars but it's a spread or premium

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to the dinner salad of twelve bucks right Three bucks

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for the south and you'd have to add twelve from

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state prize You get stick And if you really wanted

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to just use smaller numbers so that your customers would

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have the illusion that they were paying fewer box for

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dinner well you could describe everything in your restaurant as

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some spread to dinner salad such that this medium rare

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rib eye was in fact simply a spread to salad

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or premium of twelve bucks Even though you're paying fifteen

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anyway Us treasuries air broadly considered to be the safest

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bond bet in the world at least today until china

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or robots or both take everything over So when a

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bond offering is made it is priced relative to treasuries

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in the same way dinner items would be priced relative

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to that dinner salad house salad there with the oil

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and vinegar dressing that is if the bond offering is

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for say ten years than the u s treasury ten

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year paper that moment would be the foundational elements against

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which their risk your debt instruments would then be priced

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So let's say that today that ten year treasury paper

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is yielding three point two percent Caterpillar tractor wants to

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borrow a billion dollars to build their new tractor smelting

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plant there then offered by investors one hundred twenty basis

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point spread to treasuries debt deal to a fund that

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factory with a billion dollars of debt What does that

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mean It means that lenders are willing tto loan caterpillar

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A billion dollars payable in ten years at three point

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two percent per year plus one point two percent for

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total interest of four point four percent interest per year

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You know take it or leave it That's it So

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to recap this is play bond magazine and this is

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play But magazine reads it for the articles Really weird

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