Inside the Currency Market: Mechanics, Valuation, and Strategies

Fair Value

The Chicago Mercantile Exchange (CME) employs an Index Fair Value formula:

Index Futures = Cash (1 + r(x/360)) − dividends

The formula encompasses current index level, index dividends, futures days to expiration, and present interest rates. Fair value is defined as futures priced to cash. A vast majority of index pricing occurs around a fair-value price (CME).

To calculate:

S&P 500 Futures price = 1157.00 pts,

S&P Cash index = 1146.00 pts,

interest rates = 5.7 percent,

dividends to expiration of futures = 3.47 pts converted to S&P Index pts and factored by addition of dividends in index divided by index divisor, and

days to expiration of futures = 78 days.

Fair Value = 1146 (1 + .057 (78/360)) − 3.47 = 1156.68 1157.00−1156.68 = .32 ...