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 (Converted to S&P points) 3.47 pts
Days to Expiration of the Futures Contract 78 days
S&P 500 Dividend Yield 1.40%

Fair Value Calculation

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

Amount of Futures Overpricing Calculation

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

Dividend Yield Calculation

Cash Index x Dividend Yield 1146.00 x .0140
= Conversion to S&P Points = 16 pts per year (78/360)

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