Index futures fair value

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Formula for Index Futures Fair Value

The inputs to the cash-futures fair value are

  • Short-term interest rate
  • Days to expiration of the futures contract
  • Dividend yield of stocks in index
  • Price of underlying cash index


The mathematical formula is presented below

  • Future = Index * { 1 +[ ( Short-term interest rate - Dividend Yield of index ) * ( Days til future expires / 365 ) ] }

To illustrate (as of Jan 26, 2007)

  • Short-term interest rate: 4.995% or .04995
  • Days to expiration of the futures contract: 48
  • Dividend yield of stocks in index: 2.5963% or .025963
  • Price of underlying cash index: 12,487
  • Price of futures contract: 12,522 (Actual)
  • Future = 12,487 * {1 + [ ( .04995 - .025963 ) * ( 49 / 365 ) ] } = 12,527.21 (Calculated Fair Value)

Therefore, in this example at the close of trading Jan 26, 2007, the Dow 30 future was trading about 5 points or $25 below its intrinsic value* Picture of variation of fair value day by day.

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