A comparison of the fair value of the futures contract to the actual index value may indicate which way the market will open--up or down. The futures do not have a carrying cost compared to owning any of the 30 stocks in the Dow Jones. The fair value calculation adjusts the cost of the future compared to the cost of owning the Dow Jones stocks. To buy the stocks in the Dow Jones, interest would be paid on money borrowed to buy the stocks.
Owning the stocks would entitle the holder to receive any dividend payments from the stocks. Although index futures are closely correlated to the underlying index, they are not identical. An investor in index futures does not receive if long or owe if short dividends on the stocks in the index, unlike an investor who buys the component stocks or an exchange-traded fund that tracks the index.
The index futures price must equal the underlying index value only at expiration. At any other time, the futures contract has a fair value relative to the index known as the basis. The basis reflects the expected dividends forgone and differences in financing cost between the index futures and its stock components. When interest rates are low, the dividend adjustment outweighs the financing cost, so the fair value for index futures is typically lower than the index value.
Just because index futures have a fair value doesn't mean they trade at that price. Market participants use index futures for many different purposes, including hedging , adjusting asset allocation through index futures overlay programs or transition management, or outright speculation on market direction.
Whenever the index futures price moves away from fair value, it creates a trading opportunity called index arbitrage. As soon as the index futures' price premium, or discount to fair value, covers their transaction costs clearing, settlement, commissions, and expected market impact plus a small profit margin, the computers jump in, either selling index futures and buying the underlying stocks if futures trade at a premium , or the reverse if futures trade at a discount.
Index arbitrage keeps the index futures price close to fair value, but only when both index futures and the underlying stocks are trading at the same time. While the U. Liquidity in index futures drops outside stock exchange trading hours because the index arbitrage players can no longer ply their trade.
If the futures price becomes irregular, they cannot hedge an index futures purchase or sale through an offsetting sale or purchase of the underlying stocks. But other market participants are still active.
Index futures trade on margin , which is a deposit held with the broker before a futures position can be opened. Suppose good news comes out abroad overnight, such as a central bank lowers interest rates or a country reports stronger-than-expected growth in GDP.
The local equity markets will probably rise, and investors may anticipate a stronger U. If they buy index futures, the price will go up. And with index arbitrageurs on the sidelines until the U. As soon as the New York Stock Exchange opens, though, the index arbitrageurs will execute whatever trades are needed to bring the index futures price back inline—in this example, by buying the component stocks and selling index futures.
Investors cannot just check whether the futures price is above or below its closing value on the previous day, though. The dividend adjustments to index futures' fair value change overnight they are constant during each day , and the indicated market direction depends on the price of index futures relative to fair value regardless of the preceding close.
Ex-dividend dates are not evenly spread over the calendar, either; they tend to cluster around certain dates. On a day when several big index constituents go ex-dividend, index futures may trade above the prior close but still imply a lower opening. Index futures prices are often an excellent indicator of opening market direction, but the signal works for only a brief period.
Trading is typically volatile at the opening bell on Wall Street, which accounts for a disproportionate amount of total trading volume. If an institutional investor weighs in with a large buy or sell program in multiple stocks, the market impact can overwhelm whatever price movement the index futures indicate. Institutional traders do watch futures prices, of course, but the bigger the orders they have to execute, the less important the index futures' direction signal becomes.
While futures indicate where the market will go over the next few session s, fair value is the futures rate before market opening adjusted for purchasing shares at the opening. It is the cost of buying shares based on the value of the stock market futures that expire at the next expiry date. When futures are higher than fair market, investors are expecting the market to rise , while if they are lower, the market is likely to fall on opening.
As soon as trading starts, the futures rate changes and the predictive effect of fair value dissipates over the next few minutes. If you place orders for the purchase of shares at the opening of the market, fair value is an important input to help you determine the price you should pay for your shares. To determine the fair value of the stock market for investors wanting to purchase shares, the value of the futures has to be adjusted because the investor who purchases futures is not in the same position as one who buys shares.
The futures investor only has to put down the money to buy the futures while the investor who purchases shares has to pay for them. Since fair value is the amount you have to pay to buy the stocks corresponding to the futures, you have to adjust the value of the futures to reflect the interest paid by a theoretical investor who buys the stocks and the dividends the investor receives.
To make this adjustment, you take the quoted price of the relevant futures and add the amount required to finance this price until the next futures expiry date. You then subtract the dividends due over this period. The result gives you a fair market value that you can compare to the value of the corresponding futures.
0コメント