Determining the Relevant Fair Value(s) of S&P 500 Futures
- Topics:
- Commercial Lending
- Tags:
- Chicago Mercantile Exchange Holdings,
- Equity,
- Finance,
- Financial Services,
- Investment,
- Price,
- S&P 500
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Overview: A fundamental consideration for potential users of stock index futures is the determination of the futures’ break-even price or fair value. Conceptually, being able to sell futures at prices above the break-even or buy futures at prices below the break-even offers opportunity for incremental gain. This article points out an important, though widely unappreciated caveat. That is, no single break-even price is universally appropriate. Put another way, the break-even price for a given institution depends on the motivation of that firm as well as its marginal funding and investing yield alternatives. 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.
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Format: PDF | Size: 70KB | Date: Jan 2003 | Pages: 8
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