Premium and discount are important concepts in futures trading. It was initially used in the spot market of commodities and then extended to the futures market. When the spot price is lower than the futures price, the basis (spot price minus the futures price) is negative, and the forward futures price is higher than the near-term futures and spot prices, which is called futures premium, also called spot discount. When the near-term futures price and spot price are higher than the forward futures price, the basis is positive, which is called futures discount, also called spot premium.
Now the scope of premiums and discounts has become wider. It can not only refer to the price relationship between the spot commodity and the delivery month, but also can be used to express the price relationship between the alternative delivery object and the standard delivery object in physical delivery. , can also refer to the price relationship between different delivery places of commodities. Premiums and discounts reflect the specific price relationship between a certain commodity and a standard object under certain conditions. Therefore, changes in premiums and discounts have a great impact on futures prices, and investors are also very sensitive to changes in premiums and discounts.
As far as the domestic futures market is concerned, premiums and discounts can be divided into four categories: first, the premiums and discounts between spot prices and futures prices; second, the premiums and discounts between alternative delivery items and standard delivery items. The third is the premium and discount for delivery across years; the fourth is the premium and discount between different delivery locations.
The premium and discount between spot and futures prices
The premium and discount between spot and futures prices, that is, the basis premium and discount, reflects the price of commodity spot and futures Difference. The premiums and discounts here include transportation costs and holding costs between the two markets. Transportation cost refers to the spatial factor conversion factor between the spot and futures markets. The holding cost reflects the time value factor of futures and spot, that is, the holding cost between different delivery months. Holding costs mainly include storage fees, interest, and insurance (safety insurance) fees. Theoretically, the holding cost is reflected in the futures prices of different delivery months. Usually, the forward month futures price is higher than the near-month futures price, while the near-month futures price is higher than the spot price. As the delivery month approaches, the cost of holding positions continues to decrease, premiums and discounts gradually decrease, and the spot price and futures price eventually converge to unity.
The premium and discount between alternative delivery products and standard delivery products
The premium and discount between alternative delivery products and standard delivery products can be defined as: alternative delivery products approved by the exchange When delivering, the price difference between the standard delivery items and the premium and discount standards are determined by the exchange, usually based on the quality difference between the alternative delivery items and the standard delivery items. In other words, exchanges usually follow the price relationship between alternative delivery items and standard delivery items in the spot market, and at the same time ensure the scientificity, seriousness and continuity of standards for standard delivery items, alternative delivery items, and premiums and discounts.
At present, domestic futures exchanges have seen major changes in the delivery grade premiums and discounts compared to the past. The standard design of premiums and discounts for alternative delivery items relative to standard delivery items is more reasonable and proportional, and the alternative delivery items are clearer. However, the recent cotton warehouse receipt market and the premiums and discounts for glass delivery are still unsatisfactory. Excessive policy intervention has resulted in premiums and discounts that cannot reflect the true economic price of the commodity.
Premiums and discounts for multi-year delivery
Premiums and discounts for multi-year delivery refer to the premiums and discounts stipulated by the exchange when a certain commodity harvested in the previous year is used for delivery in the next year. , compared with the premium and discount when delivering agricultural products, it is more common. The delivery premiums and discounts stipulated by the exchanges for different commodities vary greatly. For agricultural products delivered across multiple years, from the perspective of storage costs alone, there should be a premium to the spot. However, since the quality of agricultural products will decline when delivered across multiple years, a discount to the spot is often used during actual delivery. In general, as long as the quality standards of agricultural products delivered across years meet the standards specified in futures contracts, physical delivery should be allowed. If the premium and discount standards for agricultural products delivered across years are not designed reasonably, it may lead to unreasonable futures prices.
Premiums and discounts between delivery locations
Premiums and discounts between delivery locations refer to the price relationship of the same commodity at different delivery locations. Futures exchanges usually designate a benchmark delivery location. If delivery is made elsewhere, premiums and discounts must be implemented based on the benchmark delivery location. Usually the standard design of premiums and discounts between delivery locations is mainly determined based on the transportation costs between the two delivery locations and the local production level. The exchange is currently doing a relatively good job in this aspect, and the standards for premiums and discounts are relatively reasonable. The recently hotly debated delivery premium of LME aluminum can also be classified into this category. But the premium issue behind LME aluminum is more complicated. Among them, the long delivery time, resulting in a shortage of spot goods, is an important reason for the rise in prices.
How much "water" is in the premium and discount?
In fact, due to the influence of supply and demand and other factors, the basis difference between spot and futures changes in complex and diverse ways. Just like LME aluminum, spot The factors for premiums are complex and diverse, and it is difficult to accurately predict premiums and discounts. The range of premiums and discounts and the reasons behind them are worth exploring, because premiums and discounts are closely related to futures prices. For example, when the demand in the spot market is strong or the supply is reduced, the spot price will often be higher than the futures price, thus increasing the spot premium. The holding cost and transportation cost can be basically ignored, and sometimes they can even form negative holding costs and transportation costs. cost. That is, the spot and near-month futures prices are higher than the far-month futures prices. At this time, the spot premium is positive.
What is the impact of premiums and discounts on futures prices? Or can the premium and discount be used as an indicator? The answer is yes.
Premiums and discounts are the link that reflects the price relationship between the spot market and the futures market. Information on premiums and discounts is very beneficial to the hedging and price discovery functions of the futures market. The high premium in the spot market indicates that spot supply is tight and demand exceeds supply. Investors can expect that futures prices are likely to rise in the near future. If the discount in the spot market is high, it means that the supply in the spot market is sufficient and the demand is weak, and the futures price is very likely to continue to follow the downward trend. Premiums and discounts may occur at any time in different time period contracts, because the premium and discount structure actually reflects the supply and demand relationship within a specific time period. Mastering the rules of fluctuations in premiums and discounts can better help hedgers take advantage of the relationship between the spot and futures prices of a certain commodity and reduce the risks caused by price fluctuations.
Precisely because the factors that affect the price premium and discount are quite complex, the price premium and discount fluctuate at any time. The prices in the futures market and the spot market are often affected by the same factors, but the changes in premiums and discounts are often different, whether in direction or magnitude. If the fluctuation pattern of premiums and discounts is well grasped, investors will make profits. However, this kind of transaction requires a huge initial investment amount and a more professional judgment of premiums and discounts.
In short, premiums and discounts reflect the specific supply and demand price relationship of a certain commodity under certain conditions. If an investor knows nothing about the general movement of premiums and discounts on a particular commodity, it is impossible for him or her to hedge his or her value on whether to accept or abandon a certain spot or futures price, if or when, and in which delivery month. , when to exit the futures market and other issues to make correct judgments. Therefore, paying attention to the research on premiums and discounts and improving the premiums and discounts system are beneficial to both investors and the healthy development of the entire futures market.