Futures fair value
Definition · Level 7 · Futures & commodities
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The price a future should have once spot, financing and income are counted: for an index, spot × (1 + (financing rate − dividend yield) × years). Away from it, cash-and-carry trades pull the price back.
Example
Spot 6,000, rate 4%, dividends 1.5%, three months: 6,000 × (1 + 0.025 × 0.25) = 6,037.50.
Where Tradecraft teaches it
Level 7 · Futures & commodities, in the lesson “Cost of carry & fair value”: Why a future stays close to spot, how cash-and-carry enforces it, and an index future’s fair value.
Related terms
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- BackwardationCurve shape where later-dated futures trade below nearer ones.
- BasisThe gap between the spot (cash) price and a futures price, usually spot − futures.
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- ContangoCurve shape where later-dated futures trade above nearer ones (and above spot), typically reflecting carrying costs such as financing and storage.