Hi folks, I use my own dax cash index and apply a premium to it in order to figure out what fair value is. Generally, the FDAX futures are in line to +/- 2 pts of where they should be. Lately, they have been consistently higher by 5 to 7 pts even though I keep checking my cash computation and interest rate. What gives????? If anyone has a resource for checking what the premium should be for the DAX (something similar to indexarb.com), then I would be appreciative of a link. Thanks, FT71
i guess you could try to figure out the expected dividends and combined with the interest rate and you should have an answer. i don´t know how accurate everything has to be though.
The dax is a performance index. The dividends are priced into the cash index through adjustment factors. The issue is not the index itself because my cash index matches that which is quoted by the exchange. The problem is the premium and its fluctuations. The only factor that effects this is the interest rate. I don't understand why it is running at such a high premium these days.
future= index * exp( (cost_of_carry) * T) cost_of_carry = risk_free_rate(T) - dividend_yield(T) UNfortunately in German language : http://www.eurexchange.com/download/documents/publications/handelsstrategien_fallstudien.pdf
Good point. I have not been paying attention to the LIBOR and have been using the Euribor rate so far to figure out the cost of carry. The LIBOR is much higher and hovering around 4.6% which gives me the right rate. It still doesn't explain the huge swings though from fair value. It is swinging from +8.0 to -1.5 on a regular basis. It would seem like a program arb would be profitable in that environment. It used to be around +2.5 to -2.0 from FV. Pretty tight.... Thanks.
Thanks. I have been creating the fair value for a while, so I'm very familiar with the computation. The issue is really having some resource to compare my notes to. Some service or site that gives the fair value and program trading extremes. Is there an ETF in Germany that represents the DAX cash index much like the SPY or DIA does for US indices?
A couple of traders at my clearing firm had mentioned that several very large trading desks/shops have actually closed their books at the end of October and are not trading during this volatile time of year. Many have had a challenging year and do not want to risk their bonus (which is sometimes 100% over their salary). I noticed this strange "jumpiness" in futures vs. cash right about the end of October. Having the futures be out of alignment with cash around 8 to 10 pts is very unusual. That is enough room to sell futures and buy cash and still have a few points of edge in the trade. Thanks for everyone's input. I learned that I should be using the LIBOR (4.6%) rate rather than the Euribor (3.9%).