Estimating Equity Index Futures Fair Value with Market Dividend Inputs
Summary
The document discusses how to assess fair value estimates for non-US equity index futures before expiry, where the estimate depends on financing costs and expected dividends. It notes that closed foreign-exchange markets can complicate the interest-rate inputs and that dividend estimates may differ across data providers. The response’s main guidance is to treat fair value as an estimate rather than a definitive value, build a model from available information, and account for the range of estimates observed among market participants.
It recommends incorporating market dividend estimates and gathering them through regular conversations with broker-dealers or an internal volatility desk. Dividend data may also surface during price discussions for single-stock or index options. The answer does not provide a specific curve-building method, a procedure for validating a model against future outcomes, or a calendar-spread trading rule. Its guidance is therefore practical and market-dependent, with reliability tied to the quality and breadth of available inputs.
Key ideas
- Fair value estimates for index futures depend on financing costs and expected dividends.
- Different providers and market participants can produce materially different dividend estimates.
- Treat model fair value as uncertain and account for the dispersion in market estimates.
- Use market dividend information gathered from broker-dealers or an internal volatility desk.
- Option price discussions can provide another source of dividend assumptions.
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# Futures Contract Fair Values Accuracy # Futures Contract Fair Values Accuracy I have recently been tasked to work on fair value derivation for futures on equity indices (non-US). I know that the FVD function in Bloomberg can have a huge discrepancy from markets: where cheap is actually expensive and vice versa. How do I determine the accuracy of my model without waiting for expiry? The main difficulties I have encountered are: - Interest rates for cost of carry (some of the countries have closed FX markets), so what is the closest approximation I should look at? Some people have mentioned NDFs but I need help on curve construction, best to ask for quotes from NDF traders? - Dividends - big difference from my calculations vs what Bloomberg's BDVD function shows (divisors differ, confirmed ex-dates and FVD missing out on dividends). How do I determine who is right or wrong? - Accuracy of fair value - given that it is only an estimate, how do people trade the calendar spreads? (Might be OT, forgive me) - And if possible, what has your experience been when deriving fair values? ## Answer by Matt Wolf (score 2) https://quant.stackexchange.com/a/8206 All pretty good questions given this is your first question on this site. Answer is you do not know with absolute certainty whose dividend model is the right one. But generally you get a pretty good read given you talk to broker dealers regularly. Anything that is estimated can by definition not be accurate so you need to build you own model with the given information at hand, which includes what other market participants are seeing. How wide the spread in estimates is also is of importance and should be taken into account by your model. I would definitely take into account market dividend rates. Even if you just infrequently trade with certain sell-side desks they generally share their dividend data. If that is not the case but you have access to an in-house vol desk then you should talk to them because they most certainly get the dividend data from whichever counter party they trade with. In fact dividend data are often shared during the price agreement process when trading single stock or index options.
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