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If you go to www.programtrading.com Fair Value is defined
-----Original Message-----
From: Edwin J DeGuzman <edwindeguzman@xxxxxxxx>
To: realtraders@xxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxx>
Date: Sunday, January 31, 1999 1:45 AM
Subject: Re: Fair value
>As I understand it, you can mathematically determine a price for a stock
>index futures contract at which it is not advantageous to arbitrage the
>contract and the underlying stocks, i.e. program trading. That
>"theoretical" price is called Fair Value. If the price is above Fair
>Value, executing buy programs is profitable; if below, executing sell
>programs is profitable. The Cox & Rubinstein book, or the Hull book, (or
>any number of finance textbooks) has the equation spelled out.
>
>And yes, the Premium is the difference between futures and cash, the
>"actual" difference. So if the Premium strays far from Fair Value, it's
>a good guess that someone's finger is about to press the trigger on a buy
>program or sell program.
>
>
>Ed
>
>
>I understand that the Premium number that is reported is the difference
>between the current futures contract and the cash value of the S&P 500
>index. Recently CNBC has been talking abou the Fair Value number. Can
>someone explain what this is and how calculated?
>
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