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Dear John,
when I do the exchange futures question, I often confused the closing future price and wonder how the closing future price be generated and traded in life. Would be appreciate should you explain it
ThanksThe price on the final day of the future must be the same as the spot rate on that date.
The price until then is determined by supply and demand (in the same way as share prices on the stock exchange). The futures market is however very efficient and prices go up and down very much in line with the movement in the spot rate. For exam purposes we assume that the basis (difference) falls linearly to zero (although in practice there is no reason why it should be precisely linear).
All of this is explained in detail in our free lectures on foreign exchange risk management.
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