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A "prospect" is asking me to reconcile the futures contract with the index
price. The back-adjusted contract should factor out (net) carry. If
t-bills averaged (for 24 years) 4.35% and dividends averaged 2.1%, then net
carry = 2.25%
The back-adjusted contract rallied from 665 to 1052 for a gain of 58% or
2.32%/yr. So total return = 2.25% +2.32% =4.57%/yr for 25 years.
Here's the problem. The S&P index actually rallied from about 175 to 1052
WITHOUT dividends for an average return of 24%!
To get these 2 returns to match the fwd price of the index has to equal the
start price of the back-adjusted contract but that would require a 5.5%
carry for 25 years 175*(1+.055)^25= 667
What am I doing wrong? Any ideas?
CE
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