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In a document from the CME, by Ira G. Kawaller, entitled "Determing the
Relevant Fair Value(s) of S&P500 Futures: A Case Study Approach" the
following is stated: "In this article five differentiated objectives are
identified, and the calculations of the respective break-even futures prices
are provided. The various objectives are: (a) to generate profits from
arbitrage activities, (b) to create synthetic money market instruments, (c)
to reduce exposure to equities, (d) to increase equity exposure and (e) to
maintain equity exposure using the more cost effective instrument via
stock/futures substitution".
This entire document, including a nice bibliography, may be viewed at the
URL
http://www.cme.com/market/fairvalu.html
----- Original Message -----
From: "Carroll Slemaker" <cslemaker1@xxxxxxxx>
To: "David J. Slavik" <djstrade@xxxxxxxxxxxxxx>
Cc: "Omega-list" <omega-list@xxxxxxxxxx>
Sent: Wednesday, August 02, 2000 7:18 PM
Subject: Re: S&P fair value
> 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
>
>
>
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