Re: S&P fair value

["Carroll Slemaker" <cslemaker1@xxxxxxxx>]

Hi David -

What's important to the arbitrageurs and program traders is not the "fair
value" directly but, rather, the threshhold prices at which the holding and
transaction costs are break-even for the two alternative positions:  hold
the future, or hold the basket of S&P stocks.

Although these hold & transaction costs (and, therefore, the buy/sell
threshholds) can differ significantly for different traders, the "fair
value" is very nearly in the center between these two threshhold values and
is relatively immune to the hold/transaction cost differences.  The reason
this "fair value" is of any value to the big guys using it for arbitrage or
program trading is that (1) it IS fairly well-defined, and (2) the actual
price USUALLY does not stray too very far from it, and (3) when it does
stray, it ALWAYS eventually returns to a value close to the "fair value".
If price did not have this property of remaining fairly close to a
relatively well-defined "fair value", it would be of little use to anyone.

Best regards,
Carroll


----- Original Message -----
From: "David J. Slavik" <djstrade@xxxxxxxxxxxxxx>
To: "Carroll Slemaker" <cslemaker1@xxxxxxxx>
Cc: "Omega-list" <omega-list@xxxxxxxxxx>
Sent: Wednesday, August 02, 2000 4:38 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