Hi

@gargi.adhikari
Your first question is a good one, I always get confused here. I just realized (remembered) that we've discussed this example, in some detail, four years ago here at

https://www.bionicturtle.com/forum/threads/determining-the-theoretical-future-price.5558
(I am linking because with Aleks helped me understand this further than I had previously....)

Per the diagram, I break this pricing exercise down into two steps:

- Applying the cost of carry, where the underlying commodity is the (assumed) CTD bond; in the example, cost of carry tells us that the
*theoretical futures price *of the CTD bond is $119.711 (dirty) or $114.859 (clean equivalent) (side note: should I be saying subtract AI?).

- Translate a theoretical futures price of CTD bond to the theoretical price of the future contract. So, to me, the final $71.79 is a
**theoretical price of the futures contract** based on a COC calculation that determines the associated theoretical price of the underlying (commodity) CTD bond.

I don't think it's a settlement price. The analogy is, say, corn commodity. We observe futures prices for, say, Dec 2016 corn. The cost of carry allows us to calculate a

*theoretical price *of the dec 2016 futures contract, which can be compared to an observed futures contract price. I guess we could think of this as something like "the theoretical estimate of the contract settlement price," but the meaning of "settlement" is very much different than Hull's deliberate use of "theoretical." (theoretical implies a value based on a model such that non-fundamental factors are specifically omitted, while "settlement" denotes traded price, to me, at a minimum). I certainly get stuck on this, too

but I hope my musing is helpful!

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