CME Products - Calculating Fair Value

Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as short-term supply and demand will cause price to fluctuate around fair value. Price discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value.

The following formula is used to calculate fair value for stock index futures:

= cash [1+r (x/360)] - Dividends

This example shows how to calculate fair value for S&P 500® futures:

Sept S&P 500 futures price	1157.00 pts
S&P 500 cash index	1146.00 pts
Interest rate	5.7%
Dividends to expiration of futures	3.47 pts
(converted to S&P points)
Days to expiration of Dec. futures	78 days
Fair Value of futures =	Cash [1+r (x/360)] - Dividends
	= 1146 [1+.057 (78/360)] - 3.47
	1156.68
Amount of futures overpricing =	1157.00 - 1156.68
	.32 pts
Dividend Yield Calculation
S&P 500 dividend yield =	1.40%
Conversion to S&P points =	1146.00 x .0140
	= 16 pts per year (78/360)

Please note: For further information on Fair Value, go to the Fair Value FAQ.