Interest in Index Futures

Discussion in 'Index Futures' started by learner2007, May 6, 2007.

  1. 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
     
  2. In simple terms:

    Future price = today's share price + interest costs - dividends received
     
  3. >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
     
  4. nkhoi

    nkhoi Moderator

  5. 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.
     
  6. I thank all of you for the information you
    provided.

    learner