To price these non-expiring markets, we use two sufficiently liquid futures contracts on the underlying commodity. This is usually the two with the nearest expiry date.
The contract with the closest expiry date is called the Front month contract and the second-nearest expiry date is called the Far month contract.
Throughout the duration of the Front month contract, the price of the NEC will gradually move from the price of the front month to the price of the far month.
As there will be an adjustment to the NEC Market price every day, your account will be subject to an adjustment in the form of a Credit/Debit to offset this price adjustment. For example, if the NEC contract is adjusted by +2 points, clients with long positions will be debited 2 x stake and clients with short positions will be credited 2 x stake. See further explanation and video below.
In our video, the front month is labelled ‘A’ and the far month ‘B’.
NEC contract market prices move from the price of market ‘A’ towards the price of market ‘B’ as the expiry date of ‘A’ becomes closer. The price of market ‘B’ may be higher or lower, depending on the commodity, than that of market ‘A’.
Daily adjustments for NEC contract markets reflect a day’s movement from ‘A’ towards ‘B’.