What do they mean by fair value of futures and futures present value? How do they come to those figures?

I see this on CNBC every day! They seem to indicate that this could indicate that the stock market would rise on a positive number and fall on a negative number! Is this an indicator or pre market trading or overseas trading? How are they making the predictions for the day? What are they basing it on?|||Normally, S%26amp;P futures trade at a price in sync with the S%26amp;P index because if they didn't, someone could buy the cheaper and sell the more expensive for a guaranteed profit.





In the morning, S%26amp;P futures are trading in Chicago before the stock market opens in New York. If the futures are trading below the price of the index calculated from the previous day's closing prices, they are said to be trading "below fair market value". This inverse applies, too.





The reason this is an indicator of how the market will open is that a lot of institutions will sell/buy futures to get rid of/take on market exposure before the market opens. When they can do stocks, they will offset their futures position and move the position to stocks.|||Hi


Just to add, is there a way to know which direction the index will close?

Report Abuse

|||To calculate fair value you take the cash future add on the days interest (to expiry) less any dividends from the underlying stocks. Any varience from this is due to supply/demand of the future and may or may not indicate where the market is going. You will see the DJ future will go from + to - during pre market hours and vice versa.|||no one knows !


i think the monkey does it !|||please read the stock market books and watch the all global markets|||Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as short-term supply and demand will cause price to fluctuate around fair value. Price discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value.


The following formula is used to calculate fair value for stock index futures:





= cash [1+r (x/365)] - Dividends





This example shows how to calculate fair value for S%26amp;P 500庐 futures:





Sept S%26amp;P 500 futures price = 1157.00 pts


S%26amp;P 500 cash index = 1146.00 pts


Interest rate = 5.7%


Dividends to expiration of futures = 3.42 pts


(converted to S%26amp;P points)


Days to expiration of Dec. futures = 78 days


Fair Value of futures = Cash [1+r (x/365)] - Dividends


= 1146 [1+.057 (78/365)] - 3.42


1156.54


Amount of futures overpricing = 1157.00 - 1156.54


.46 pts