Commodity Markets and Futures › Key Parameters
Michael BrenndoerferNovember 12, 20251 min read
Quantitative FinanceAll chapters Part 3 of 15Forwards, Futures, and Options
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The key parameters for analyzing futures pricing and hedging are:
- spot: Current market price of the physical commodity for immediate delivery.
- time_to_expiry: Time remaining until the futures contract matures, typically expressed in years.
- risk_free_rate: The theoretical return on an investment with zero risk, used for discounting future cash flows.
- storage_cost: The cost of holding physical inventory, expressed as a percentage of the commodity's value.
- convenience_yield: The implied benefit of holding physical inventory rather than futures, which reflects supply scarcity.
- hedge_ratio: The size of the futures position relative to the spot exposure, used to minimize variance.