question about futures rolling over

Discussion in 'Index Futures' started by joeyata1, Nov 24, 2005.

  1. for instance the dec es's are at 1268ish and the marchs are at 1276. if the futures went sidways till dec expiration would the marches lose there premium over the dec's and move to 1268?
  2. I don't believe futures premiums are a function of volatility. They're derived from current interest rates and the dividends paid on the underlying index, so the premium would be smaller than now but decrease at a steady pace.
  3. Chagi



    F = S*e^[(r-q)(T)]

    F = Futures price
    S = Spot price
    r = risk-free
    q = yield
    T = time

    Note - the above rates are continuously compounded.

    So, F declines as T declines, all else being equal. This is called a normal (or contango) market.
  4. so again my question. if i shorted the march es's at 1276 and the futures went sideways till dec expiry would the marches decline from 1276 to 1268 were the dec's are now? what i'm trying to figure out is on a short if my direction is right i'd get a double bang with the fall in futures and price erosion in the march's
  5. landboy


    Not quite, since there's only 1 month left till Dec's expiration and 3 months from Dec to Mar expiration, so the March will most likely fall to about 1274 or somewhere between. The Decembers will also fall a little bit, but not as much since there is only 1 month to expiration, so it'll probably fall to 1266, to equal the cash on expiration.