Would someone be so kind as to explain what the interest that is figured into the index futures price represents. Thank you very much, learner
>makloda Thank you. But I should have been clearer with my question. For example, does the interest represent what the buyer would pay up until the expiration date to borrow the funds to purchase the shares ? Or could it be what the seller would have received in interest up until the expiration date on the funds from the immediate sale of the shares? Or, ....? Thank you again, learner
archived seminar Trading CME E-mini⢠Futures Fair Value (#11 from top) covered this topic, you might have to do free registration first http://www.cme.com/edu/events/od/index.html
When you buy an equity index futures contract you do not pay today* - you pay on expiration whatever the spot price is then. So the cash you theoretically set aside to pay on delivery is still yours, earning interest until then (assume at the risk free rate). The alternative is to buy the equivalent value basket of equities at spot, in which case your cash is gone but you get the dividends. *The exchange requires that you put up margin and your position is marked to market daily.