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Hi All,
Below is what Interactive Brokers does ref SP Fair Value. Could be of
interest.
Regards:
Dear Mr. Gress:
The arbitrage meter does not work for options but it does work for stock
indexes.
The bar you refer to is the Arbitrage Meter. I have provided a description
of the meter below.
The "fair value" of an equity index can be calculated for any future time
by using the Cost-to-Carry Model. This model states that the future value
is the present value plus the expected interest to be earned to the future
date less the expired dividends to be paid out to the future date. This
can be expressed as the following formula.
Fair Value = Index Price + Interest - Dividends
The Interactive Brokers Arbitrage Meter uses this method to display the
deviation between the fair value of the index on a futures expiration date
and the last sale price for the same futures. If the futures price is
higher than the fair value (i.e. a "premium') then the Arbitrage Meter is
green and if the futures price is lower than the fair value (i.e. a
"discount") then the Arbitrage Meter is magenta. The length of the bar is
indicative of the extent of the discount or premium.
We use Euro dollar interest rates and dividends to calculate fair value.
To learn more about fair value you may consult the following references.
Hull, John C., Options, Futures, and Other Derivatives, Third Edition.
(Upper Saddle River, NJ: Prentice Hall, 1997). P. 59.
Kolb, Robert W. Understanding Futures Markets, Fifth Edition. (Maiden, MA:
Blackwell Publishers Inc., 1997). Pp. 67-89.
You can view a copy of our Instructions Manual on our INSTRUCTIONS page
located at
hftp://www.interactivebrokers.com/htmi/tws/instructions/instructions.htmi
Jerry Gress
Stockton, Calif. USA
trader@xxxxxxxxxxxxx
----- Original Message -----
From: "David J. Slavik" <djstrade@xxxxxxxxxxxxxx>
To: "Carroll Slemaker" <cslemaker1@xxxxxxxx>
Cc: "Omega-list" <omega-list@xxxxxxxxxx>
Sent: Wednesday, August 02, 2000 7:38 PM
Subject: Re: S&P fair value
> Carroll:
>
> I did not intend to say that Fair Value that any one firm publishes is the
> "correct" value. In reality, based on what the instructors from the CME
> have told me, there is not such thing as "one correct Fair Value". Fair
> Value is calculated by different firms, using different interest rates,
and
> other inputs, based on what they are trying to accomplish in their use of
> Fair Value. Therefore, Fair Value is in the eye of the user, and may
differ
> for other users.
>
> David
>
>
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