The adjusted futures price refers to the modified price of a futures contract after changes such as dividends, stock splits, or other corporate actions. This adjustment ensures traders do not face unexpected losses or gains due to external factors unrelated to market movements. The goal is to maintain fairness in trading and reflect the true market value of the contract.
How Adjusted Futures Price Works
Futures prices might be modified based on corporate actions in an underlying asset. For dividend payments, futures prices are lowered to regress the payout. Stock splits are adjusted so the futures contract price reflects the new share value. This ensures that the trader is not unreasonably affected by such changes, and the contract price remains consistent with the market conditions.
Advantages of Adjusted Futures Price
Here are some key reasons why adjusted futures prices matter:
- Fair Trading: Adjustments prevent traders from gaining or losing unfairly due to corporate actions like stock splits and dividends.
- Market Accuracy: The adjusted price reflects the actual value of the futures contract, making trading more transparent.
- Smooth Trading Process: By adjusting futures prices, exchanges ensure that trades continue without disruption despite corporate actions.
- Helps in Analysis: Investors and traders can make better decisions by considering adjusted prices instead of unadjusted ones, which may give misleading signals.
Conclusion
Futures trading is the most important term for the adjusted futures price. It ensures corporate actions do not disadvantage traders and keep the market price valid. Understanding how to make these adjustments will help traders to make informed decisions and limit surprise risks.