What is Fair Value? CNBC's most FAQ
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What is Fair Value?
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One of the most frequently asked question from viewers calling into CNBC's morning The Squawk Box has been "What is Fair Value?". Almost every day, CNBC gives viewers the theoretical prices for program trading, listing the Fair Value, along with certain levels in the premium (or spread) that would theoretically cause program buying or program selling to hit the markets. In addition, every time that the NYSE puts collars on computer assisted program trading, CNBC shows a graphic on your television screen that says "Curbs In". So naturally a lot of viewers call in asking about the so called "Fair Value" and wanting to know exactly what it is and what it means.
According to Professor Hans Stoll at Vanderbilt University the formula for Fair Value is really very simple. Of course that is easy for him to say, since he is one of the world's leading academic authorities on equities markets, listed options, program trading and a bunch of other stuff about stock markets.
Here is Professor Stoll's formula for Fair Value:
FV = S [1 + (I - D)]
Where "S" is the S&P 500 Index known as , SPY on the Chicago Mercantile Exchange, or SPX on the NYSE and CBOE exchanges.
Where "I" is the amount of interest paid to your broker to borrow the money to buy all of the stocks in the S&P 500 Index. The interest is calculated based on a percentage lending rate (R) from the current date (today) until the date that the S&P Futures Contract expires (H, M, U, or Z).
Where "D" is the amount of Dividends paid to you from all of the companies that you own in the S&P 500 Index. The dividends are paid to you based on the record dates for each stock in the Index that are announced between the current date (today) and until the date that the S&P Futures Contract expires (H, M, U, or Z). This dividend income is expressed as a percentage rate too.
That's it. Wasn't that simple. Fair Value is nothing more than...
...the value of SP500, plus the interest I pay my broker to buy the stocks, minus all of the dividend checks I get.
Now that you know what Fair Value is, you can go on to learn exactly what it means and how it works. And; more importantly, how you can make it work for you with your trading and investments. Just click the FAQ. And, if you really want to learn everything about fair value, buy/sell programs, program trading pattern recognition, and all you need to know about computerized trading programs, then join us in 1999 for one of our Program Trading Seminars.
What! You didn't get the same number that is on CNBC? That's because they subtract the S&P 500 Index price from the Fair Value in the above formula; and, express Fair Value as the difference.
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