Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: GVTucker who wrote (95353)	1/7/2000 12:13:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 186894

The fair value of the futures over the cash for the S&P 500 is the risk premium of the market. There's a mathematical proof of this; I'll spare you. Given that the risk premium is a subjective number, fair value is also a very subjective number. In fact, I argue that it is better to derive the market's current guess of the risk premium by using the futures as a guide, rather than the other way around. I don't know what you mean by fair value being subjective. I thought that the premium that the S&P futures had over the cash was strictly mathematical dealing with the relative return of the two. Since the dividend yield on the S&P 500 is below the risk-free rate of return, then the distant contracts sell at a premium. If the two get far enough out of line there is an arbitrage potential that is exploited and the relationship is restored. As an example of a futures contract where the payment is larger than the risk-free return you can look at the T-Bond contract. This future has distant contracts that sell at a discount to the nearby ones. Once again it is strictly a mathematical relationship with the relative return and the time until expiration of the contract.