Home Page
Distant Months Contracts
IndexArb Values vs. Time
Stock Performance vs. Indexes
Capitalization Analysis
Index Component Weights
Dividend Analysis
Fair Value Decomposition
Yield Curve
Program Trading Calculator
Help
Terms of Usage/Disclaimer
Contact Us
Demo of Institutional Services
To Subscribe

     Log-In:      
Institutional Subscribers
Advanced Services
Fair Value Premium Decomposition

for Oct-24-2014
Updated: Friday, Oct-24-2014
12:10am ET
Fair value premium, hereafter called just fair value, is that difference between the futures value and the spot index value such that the futures and the equity markets are in equilibrium. (Some label fair value as the value of the futures and fair value premium as the aforementioned difference; the convention here is to label the difference as fair value.) At fair value, there is no positive nor negative bias that the two markets mutually exert on each other.

Fair value (FV) is equal to the interest that could be earned on the index (i.e., cost of carry) minus the relevant stock dividends occurring during the futures' duration, which is the time from the given date (which is usually today and, for this web page, is the "for" date listed under the page title) until the futures' settlement (expiration) date. Thus, fair value consists of the two components of interest earned and dividends. This web page illustrates the magnitude and, hence, comparative relevance of these two components.


In Summary:
FV = Interest on the index from now to the future's expiration - Dividends(Divisor Adjusted)
 
FV =
  (Number Days / 365)
Index Value * [(1 + interest rate)   -1]
 
-
 
(Sum of Dividends) / Divisor

 

Index Futures

Number
of Days
to End

Interest Rate %
(from Yield Curve)
(Link to Details)
  

Interest on the Index

-

Dividends
(Divisor Adjusted)
(Link to Details)
  

=

Fair Value
(FV)
S&P 500              
    DEC 2014 56   0.39    1.17     - 7.14    = -5.97   
    MAR 2015 147   0.34    2.67     - 17.92    = -15.25   
    JUN 2015 238   0.31    3.91     - 28.65    = -24.74   
Nasdaq 100              
    DEC 2014 56   0.39    2.42     - 10.78    = -8.36   
    MAR 2015 147   0.34    5.48     - 23.40    = -17.92   
    JUN 2015 238   0.31    8.04     - 36.66    = -28.62   
Dow Jones              
    DEC 2014 56   0.39    10.04     - 82.33    = -72.29   
    MAR 2015 147   0.34    22.79     - 184.17    = -161.38   
    JUN 2015 238   0.31    33.41     - 287.88    = -254.46   



 
The above Fair Values are based on the following Spot Index Values:
Index Spot (Current) Value
S&P 500 1950.82       
Nasdaq 100 4012.27       
Dow Jones Industrial Average 16677.90       


 
Notes to the Calculations
  • Internal values have a precision of at least twelve decimal places. Displayed values, however, are rounded to two decimal places.
  • Therefore, if you perform computations using the rounded amounts in the above two tables, you may get slightly different values.

 

No portion of this page or web site may be copied, retransmitted, or redistributed in any manner for any commercial use. You may use the site and its information to help in formulating your personal investment decisions; doing so signifies that you accept our
Terms of Usage and Disclaimer.
All pages, content, images, and design Copyright 2000-2014 Ergo Inc. All Rights Reserved Worldwide.