Principle of least error

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
• ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
• Convenience yieldThe rupee benefit of physically holding a commodity rather than holding a futures contract on it — the term that lets a futures price fall below spot plus carry.
• ConvergenceThe certainty that a futures price and the spot price of its underlying meet at expiry — because on the last trading day the contract settles at the cash market price, leaving no room for a difference.
• Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
• Fair valueThe theoretical futures price — spot plus the cost of carrying the commodity to expiry — at which a buyer is indifferent between buying today and buying forward.