The presentation yesterday went well, although there was the usual puzzlement about whether expectations about house price growth enter into the calculation of the forward price.
The best trick I can think of, although this doesn’t always work, doesn’t require any mathematics, just logic.
We use the present tense ‘is’ to capture the state of things as they are now, and the future tense ‘will be’ to capture the state of things as they, er, will be. We can add ‘will be in the future’, but ‘future’ comes from the Latin ‘futurus’, which is the future participle of the verb ‘to be’ in Latin (esse), so ‘will be in the future’ means ‘will be in what will be’.
When we say what is the case, our assertion depends on what we observe or measure now. When we state what will be the case, it depends on prediction or forecasting. If the forecast is of an eclipse it is likely to be accurate. If of next year’s price of the FTSE, less so.
Now ‘forward’ or ‘future’ price does not mean the price that some contract will have (in the future), i.e. ‘future’ does not qualify ‘price’. Rather, it is the delivery and payment which are future. ‘Future’ qualifies ‘delivery’. By contrast, the price of that contract is now. So ‘futures price’ means ‘current price of a contract for future delivery’. If those who teach these things in business or actuarial school properly explained that, I suspect there wouldn’t so much confusion. Perhaps a little, but not so much.
Now the forward contract (i.e. contract for forward delivery) does have a future price, for its price is changing all the time, moreover it will change in a generally unpredictable way, but that clearly does not depend on its current price, for obvious reasons. A contract for present possession also has a future, price, which as it happens will coincide with the price of the forward contract at time of delivery (for then the contract for future delivery becomes a contract for possession).
So the current price of a contract for future delivery is entirely independent of what its future price will be. Sort of makes sense, no?