Estimating the Costs of Replicating an Equity Index with Futures
Summary
The document examines the costs of maintaining an equitized Euro Stoxx 50 exposure by rolling quarterly futures into the next liquid contract. It asks whether reported increases in index futures holding costs are plausible and what components could explain them. The answer points readers to studies and reports from an exchange, an asset manager, and another investment manager, while noting that one source may be biased.
A second response gives a rough cost illustration using an approximate contract value, a one-tick bid-ask spread, three annual rolls, and broker commissions. It adds an initial spread, roll spreads, and estimated commissions to produce an annualized cost estimate as a fraction of contract value. This is an illustrative calculation, not a validation of the reported historical change; actual costs depend on execution, broker fees, roll method, and market conditions. The document gives no underlying comparison of costs over time.
Key ideas
- Futures replication costs can include bid-ask spreads, roll transactions, and broker commissions.
- The example estimates annual costs for an initial purchase, quarterly rolls, and liquidation.
- The calculation is illustrative and depends on assumptions about contract value, spreads, and commissions.
- The cited reports may inform historical comparisons, but the document does not validate the reported increase.
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Full text
# How to properly assess the costs of replicating an index via futures contracts? # How to properly assess the costs of replicating an index via futures contracts? I would like to validate this sentence, coming from a WSJ article: > The cost of holding a Eurostoxx 50 future, for example, has climbed from an average of 0.07% of the contract value since 1998, to an average of 0.45% over the last year, according to BlackRock calculations based on broker estimates. While my gut feeling tells me that that this indeed could be true I want to understand the exact reasons. Lets take an equitizing strategy that rolls an EuroStoxx 50 future quarterly into the next liquid contract. What are the main factors that drive the costs of this replication strategy and how did they change in the last years to support the statement above? ## Answer by Dima (score 4, accepted) https://quant.stackexchange.com/a/18387 I don't have much experience in the matter, but I've been doing some related literature research recently and I think these links can be helpful: A rather recent study from CME A (possible a bit biased) report by BlackRock A report by Lyxor (asset manager affialiated to Societe Generale) ## Answer by Fermion Portal (score 2) https://quant.stackexchange.com/a/18388 The current contract value is roughly 30k euros. The bidask spread is 1 tick, which equals 10 euros. Lets say you buy the contract and roll 3 times a year and then liquidate your position at expiry. You will hence pay 1 full bidask spread + 3 rolls, which if done via spreads with market orders, are equal to 1 tick each, hence you will pay 40 euros on bidasks + comissions, which can vary depending on the broker, but you can probably assume it is on average 5 euros per transaction. Hence over all, for the year, you can expect to pay 25+40~65 euros, which equates to roughly 65/30k ~= 0.22%
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