Calculating Fair Value in Futures Markets (2024)

FAQs

How to calculate fair value of futures contract? ›

In the futures market, fair value is the equilibrium price for a futures contract or the point where the supply of goods matches demand. This is equal to the spot price and accounts for compounded interest and lost dividends resulting from the futures contract ownership versus a physical stock purchase.

Fair Value = Cash - Dividends

Here, cash denotes the current value of the security, r is the prevailing interest rate charged by the broker, x is the number of days left in the contract, and dividends refer to the number of dividends that the investor will receive before the expiration date.

Determining fair value

The Peter Lynch fair value calculation assumes that when a stock is fairly valued, the trailing P/E ratio of the stock (Price/EPS) will equal its long-term EPS growth rate: Fair Value = EPS * EPS Growth Rate.

The futures value is the current futures price multiplied by the contract size.

The formula for computing futures prices can be expressed as: Futures Prices = Spot Price * [1 + (RF * (X/365) - D)], where: The risk-free return rate, RF, signifies the rate one can earn throughout the year in a perfect market.

Fair value formula = Cash [1 + r (x/360)] – Dividends

r is the current interest rate that the broker charges. x is the remaining days in the futures contract.

» securities for which market quotations are readily available must be priced at. market value; and. » all other securities must be assigned a “fair value as determined in good faith by the board of directors” of the fund.

Fair market value is intentionally distinct from similar terms, such as market value or appraised value, because it considers the economic principles of free and open market activity. In contrast, the term market value refers to the price of an asset in the marketplace.

Quoted market prices in an active market are the best evidence of fair value and should be used, where they exist, to measure the financial instrument.

Warren Buffet Fair Value Calculator. Warren Buffett calculates a stock's fair value based on the future cash flows it will generate, minus an appropriate risk premium.

What method is FMV calculated? ›

The fair market value of property can be determined by several methods. A popular method is that the fair value can be set at the highest bid when selling the asset. Essentially, as long as you get the value you determined to be the fair price or more, it can be termed as the FMV of property.

Fair market value is the price a business, property or other asset would sell for in an open and competitive market where the buyer and seller have adequate information of relevant facts, a reasonable time to complete a deal, are under no compulsion, are acting in their own interests and mutually agree on the price.

Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates.

For example, assume we have $1,000 today and we invest it at 5% for one year. In one year, we will have $1,050.00. In this simple example, the future value is calculated as the present value*(1+the interest rate), or 1000*(1.05). If we made the same investment for two years, the future value would be $1,102.50.

Specifically, the fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current index value, dividends paid on stocks in the index, days to expiration of the futures contract, and current interest rates.

Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates.

A future contract's notional value is it's contract size multiplied by it's current price. It indicates the value of the underlying asset based on quantity and how much it is trading for, which helps you make decisions about a position and trade.

Fair Value Versus Futures Price

The futures price may be different from the fair value due to the short-term influences of supply and demand for the futures contract. The fair value always refers to the front-month futures contract as opposed to a further out month contract.