# 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:

## Values

Sept S&P 500 Futures Price 1157.00 pts 1146.00 pts 5.7% 3.47 pts 78 days 1.40%

## Fair Value Calculation

Cash [1+r (x/360)] - Dividends 1146 [1+.057 (78/360)] - 3.47 = 1156.68

## Amount of Futures Overpricing Calculation

Price - Fair Value of Futures 1157.00 - 1156.68 = .32 pts

## Dividend Yield Calculation

Cash Index x Dividend Yield 1146.00 x .0140 = 16 pts per year (78/360)

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