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On Nov 12, 11:43am, Eric wrote:
Subject: Dow Futures Fair Value
RTer's,
Have any of your data services begun providing the Premium reading for
the Dow futures vs DJIA? DTN doesn't seem to know what I am talking
about when I ask them.
Has anyone seen a source of daily "fair value" computation for this
premium?
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"Options as a Strategic Investment" by Lawrence McMillan, has a section
on calculating Futures Fair Value.
Futures Fair Value = index *[1 + time * (rate - yield)]
where index is the current value of the index itself, rate is the current
carrying rate(typically, the broker loan rate), yield is the combined
annual yield of all the stocks in the index, and time is the time, in
years, remaining until expiration of the contract.
example:
s&p = 160
broker loan = 10%
yield of all stocks in index = 5%
time = 3 mos remaining until expiration (.25 years)
future fair value = 160 * [1 + .25 * (.10 - .5)]
160 * (1 + .0125) = 162
Please refer to Larrys book for a more indepth explanation of these and
other equations.
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