Effects of Uncertainty on Future prices

Quantitative Finance Level 1

How does the price of a future change as volatility of the underlying increases?

Increases. Since it is riskier, the risk is priced in. Increases. Since it is riskier, fewer people want to sell it. Decreases. Since it is riskier, fewer people want to buy it. Decreases. Since it is riskier, the risk is priced in. Stays constant. Volatility has no effect.

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Calvin Lin by Calvin Lin

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1 solution

Pasha Khokhlov
Apr 30, 2018

Futures contracts are usually priced with conditional expected value. Volatility does not play a role in most future pricing models.

16 Helpful 3 Interesting 0 Brilliant 7 Confused

I’d like to note that with many option futures, or stock futures, the contracts depending on expiry are very impacted by volatility. Please comment if you think I’m wrong or disagree

Nicholas St. Angelo - 1 year, 10 months ago

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The problem only refers to a simple futures contract.

M-Cee Malicsi - 1 year, 8 months ago

For option futures, its true because options themselves depend on volatility, but not for stock futures!!

Shubham Jain - 1 year, 1 month ago

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