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How does the Futures vs Spot correlation work?


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How does the Futures vs Spot correlation work?

  #1 (permalink)
TradingTom
Munich Germany
 
Posts: 32 since Jan 2017
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I have a bunch of questions or rather want to make sure I've understood this correctly. I'm referring to Currency Futures and their spot equivalent such as 6E / EURUSD.

1) A Futures contract initial value is computed via Futures price = Spot price + carrycost till expiration

2) From this point on they are separate products, i.e. no authority will adjust the Futures price to match the spot price (at EOD for example).

3) They are kept in ling by HTF arbitrage algos

4) Spot market is usually leading due to its size

Are these assumptions correct so far?

Regarding the arbitrage algos, how exactly do they work?
Lets assume someone big sells 1000 lots @ market on the spot market. Will now market orders hit the Futures product until price is back in line with the formula from 1)?

What about 1000 lot limit order sitting on the spot market. Will a corresponding limit order become visible on the Futures DOM?

Thanks a lot for helping me wrap my head around this and understand how the actual mechanics work.
Have a nice day!
Tom

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  #3 (permalink)
 MacroNinja 
Buenos Aires Argentina
 
Experience: Advanced
Platform: NT, MT4, Sierra
Trading: S&P, Bonds, Crude, FX
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Arbitrage robots will enforce the price difference as suggested by your #3. Usually a good assumption that they are doing their jobs correctly unless you are talking about the exotic crosses spot market.

Spot market does not necessarily lead. Usually someone looking to put on size will take the position in all markets, spot, options of spot, futures, and options of futures.

If price minus carry difference is wide enough until delivery date, the arb bot will buy the overpriced and sell the under priced.

Limit orders on spot market will not appear on your futures DOM.

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Last Updated on March 2, 2017


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