Rhody Trader
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There might be something available in real-time, but you'll have to do some digging to find it and in the meantime you could probably do it quite easily yourself. The fair value of a futures contract is the price which accounts for the carry of the underlying instrument(s) such that if you were to buy the underlying today and sell a futures contract against it you would receive the cost of ownership of the underlying (storage, for example).
Rhody Trader
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SPI?
Rhody Trader
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I'm trying to rewind back to my early days as an analyst when I spent considerable time deal with CTD and all that. Keeping in mind that the contract itself has a specified coupon rate for its specifications, I should think that changes in CTD have less to do with the fair value determination than they do with the effective duration of the contract.
Smiley,
I posted this in another thread. Note: your fair value is shown here as Future value.
GJ,
I don't think dividends enter into the equation for index futures because they are cash settled; and/or the dividends are assumed to be re-invested in the constituents as per the DJ Stoxx index (or is it the DAX?).
A future, on an index for example, represents the value of the current underlying index (the "cash" or "spot") at some point in the "future".
The future value (fair value) is the "cost-of-carry" of the cash index.
From the future's value, the underlying (theoretical) cash index value can be determined by discounting the future's value.
For example,
Cash index = 6840, interest rate = 4%, future expiry = 51 days.
Future value = Cash index x exp(interest rate) x (days/365)
= 6840 x exp(0.04 x 0.14) = 6878.
Cash value = Future value / exp(interest rate) x (days/365)
= 6878 / exp(0.04 x 0.14) = 6840.
Assuming no change in the value of the cash index, with 17 days to expiry the future value will equal 6852, ie less than the future value with 51 days to expiry. Another way to look at this is to think in terms of time value (days to expiry), ie the greater the time value, the greater the value of the future.
Assume the cash index at expiry has fallen to 6800. The future value is:
6800 x exp(0.04) x (0/365) = 6800, ie it has converged with the cash index.
Theoretically, if either cash and future diverge significantly from their theoretical values an arbitrage opportunity (risk-free trade) is available.
For example, if our future value is at 6903 (25 points above its theoretical value) then one would sell the over-priced future at 6903 and buy the constituents of the cash index for 6840. At expiry, assuming cash at 6800 we will have:
sell underlying constituents at 6800 = -40 (notice we have a loss here but it doesn’t matter)
buy future at 6800 = 103 ( we sold at 6903 and bought back at a lower price)
net = 103 – 40 = 63.
Grant.
I posted this in another thread. Note: your fair value is shown here as Future value.
GJ,
I don't think dividends enter into the equation for index futures because they are cash settled; and/or the dividends are assumed to be re-invested in the constituents as per the DJ Stoxx index (or is it the DAX?).
A future, on an index for example, represents the value of the current underlying index (the "cash" or "spot") at some point in the "future".
The future value (fair value) is the "cost-of-carry" of the cash index.
From the future's value, the underlying (theoretical) cash index value can be determined by discounting the future's value.
For example,
Cash index = 6840, interest rate = 4%, future expiry = 51 days.
Future value = Cash index x exp(interest rate) x (days/365)
= 6840 x exp(0.04 x 0.14) = 6878.
Cash value = Future value / exp(interest rate) x (days/365)
= 6878 / exp(0.04 x 0.14) = 6840.
Assuming no change in the value of the cash index, with 17 days to expiry the future value will equal 6852, ie less than the future value with 51 days to expiry. Another way to look at this is to think in terms of time value (days to expiry), ie the greater the time value, the greater the value of the future.
Assume the cash index at expiry has fallen to 6800. The future value is:
6800 x exp(0.04) x (0/365) = 6800, ie it has converged with the cash index.
Theoretically, if either cash and future diverge significantly from their theoretical values an arbitrage opportunity (risk-free trade) is available.
For example, if our future value is at 6903 (25 points above its theoretical value) then one would sell the over-priced future at 6903 and buy the constituents of the cash index for 6840. At expiry, assuming cash at 6800 we will have:
sell underlying constituents at 6800 = -40 (notice we have a loss here but it doesn’t matter)
buy future at 6800 = 103 ( we sold at 6903 and bought back at a lower price)
net = 103 – 40 = 63.
Grant.
A Dashing Blade
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Swap curve for cost-of-carry to futures maturity and forecast dividend flow (which, to be super-accurate, should be discounted to present value, so you're gonna need to back the out the zero-curve)
Rhody Trader
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You wouldn't directly use the fair value price in trading or scalping unless you're doing the arbitrage between the futures and the underlying index (meaning either an ETF or some basket of the constituent stocks) which serves to keep the two in line. That's a game for larger players, generally. Because of that arbitrage activity, most traders won't concern themselves at all with fair value. A scalper might in trying to seek out where misalignments arise that are likely to be quickly corrected.
Rhody Trader
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In all likelihood they are using it to approximate where the cash market will open based on how the futures are trading. That's why you will often hear that sort of thing on CNBC in the morning: "futures are 10 points above fair value" - meaning the market will probably open up about 10 points if nothing changes in the interim.
Personally, I gain a lot of insight into the market's strength or weakness based on how it actually does open against where futures suggest that it should. I'm not a scalper, but that what the pro you refer to might be looking at as well.
A Dashing Blade
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Dax assumed dividends are reinvested, dunno about the stoxx, FTSE & Dow don't.
GJ,
No, I think I'm wrong. Re-reading my old textbooks it seems that div's are accounted for. But if you consider DB's equation for the interest rate, different dates for each constituent's dividend, price weighted or cap-weighted, etc. Sod it.
Re your manifestation of an assumption (sounds like Catholic dogma) for reinvetment of DAX dividends.
I think this is correct: theoretically, a stock's price will decrease by the amount of dividend when the dividend is paid. Re the reinvestement assumption of the DAX. Rather than the dividend coming out of the stock, it is actually reinvested back into the stock, eg stock 100, div at 5, ex-div price of stock equals 105. Isn't there a potential arbitrage here?
I could be wrong again. I'll try and check.
Attached is an Excel sheet for the determination of weightings of DAX constituents.
Grant.
No, I think I'm wrong. Re-reading my old textbooks it seems that div's are accounted for. But if you consider DB's equation for the interest rate, different dates for each constituent's dividend, price weighted or cap-weighted, etc. Sod it.
Re your manifestation of an assumption (sounds like Catholic dogma) for reinvetment of DAX dividends.
I think this is correct: theoretically, a stock's price will decrease by the amount of dividend when the dividend is paid. Re the reinvestement assumption of the DAX. Rather than the dividend coming out of the stock, it is actually reinvested back into the stock, eg stock 100, div at 5, ex-div price of stock equals 105. Isn't there a potential arbitrage here?
I could be wrong again. I'll try and check.
Attached is an Excel sheet for the determination of weightings of DAX constituents.
Grant.
Rhody Trader
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Unless you're into the arbitrage (and probably an institutional player) you aren't likely to give much thought to the actual level of fair value because you can just assume that the arbs will keep futures and cash pretty much in line. A trader could theortically maybe grab and extra few ticks or get a slightly better entry point if he saw as misalignment, knowing it was likely to be corrected, but if you're a directional player that's probably asking for trouble at some point.
Smiley,
It's always beneficial to know the theoretical basis for the markets/instruments but as RT points it isn't strictly applicable to trading the index future. Mis-pricings will be short-lived, and possibly too small for the retail investor to exploit profitably. Just trade direction. Keep it simple.
Grant.
It's always beneficial to know the theoretical basis for the markets/instruments but as RT points it isn't strictly applicable to trading the index future. Mis-pricings will be short-lived, and possibly too small for the retail investor to exploit profitably. Just trade direction. Keep it simple.
Grant.
Unless you're institutional fair value isn't really worth looking at I don't think. The only thing you can do on the back of it is trade basis which again can be capital-heavy.
As mentioned fair value in a day-to-day context seems to be where markets open with all things considered from o/n session.
As mentioned fair value in a day-to-day context seems to be where markets open with all things considered from o/n session.
