The Coromandel Yarn Factory has a treasurer who believes that the Dec S&P futures contract reveals...

The Coromandel Yarn Factory has a treasurer who believes that the Dec S&P futures contract reveals the market’s expectations of where the S&P will be in Mid-Dec. And that when people are bullish and optimistic the Dec contract price will be higher than the current Index price, and when they are bearish and depressed it will be lower. Briefly comment on this. Do you agree? Explain.

Expert Solution

Future contracts will be derivative contracts which will be based upon the underlying price and there will be an expectation by the speculators about prices of the underlying securities in the future so in this case, it is seen that treasurer is advocating that futures will be higher when the people are bullish and when the people are bearish, it would be lower than the current market price and I agree with him because when there will be an expectation of bullish sentiment and economic recovery and performance of stock on the higher side, then the future will be trading higher than the spot price whereas if there is a bearishness in the market, it would mean that expected future price will be lower than that of the spot price as this is representing the pessimism of the investor in the future regarding performance of various stocks

I do agree, future contracts are often trading at premium or discount in relation to the spot contract on the basis of expectation of various speculators in the market and they will be deciding the trajectory of future contracts based upon their expectation.

jeff jeffy answered 2 years ago

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