

Fair Value Premium Decomposition
for Dec052016

Updated: Saturday, Dec032016
11:40pm 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) 


(Number Days / 365) 

Index Value * [(1 + interest rate) 

1] 



(Sum of Dividends) / Divisor 




