Good morning,
I just noticed your post and thought I would try to give a useful answer.
The are 3 separate things here:
1) the ftse cash market, i.e. the real ftse index, calculated using the actual stock prices,
2) the ftse daily as calculated by the spreadbetting firms, and
3) the ftse futures.
This is how they work:
The ftse cash is exactly what it says it is, and forms the basis for the other two:
The ftse futures are effectively a way of buying the real ftse 'cash' on credit, and they expire in Mar, Jun, Sep, Dec.
The calculation for this is S.(e^rt)-d, or more simply S.(e^(r-y)t)
Where S is the price of the cash market,
e is the base of the natural logarithms (used for continuous compounding),
^ is a symbol I have used to mean "raised to the power of",
r is the riskless intererst rate,
t is the time to expiry in years, and
d is the dividend amount for the period, or
y is the equivalent dividend yield.
The calculation is actually a lot more complicated than this, but this is a good theoretical one. This futures price is called the fair value, although the term is often incorrectly used to refer to the spread between the futures and the cash, and expressions like 'the futures are trading above, or below, fair value are heard when the futures get out of line. It is when they are out of line by too much that arbitrage between the two can occur, but that is a separate issue.
Now the ftse daily as calculated by the spreadbetting firms. This is none other than a theoretical 'cash market' price derived by working the equation backwards from the futures price. They calculate it this way because the futures are the only way in which they can hedge their positions. This ftse daily can therefore also be called an 'implied cash price', because it is the price 'implied' by the futures.
The reason that the ftse daily and the cash price sometimes differ is simply because the cash price and the futures prices differ as well as traders impact upon them differently, as I have alluded to above.
I hope this helps.
W.Robinson
Author: Trading for Wealth
out on Amazon very soon, or email
[email protected]
