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Valuing a Tracker Certificate on Index Futures

Article Quant Q&A · Author: T123
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Summary

The document asks how to value a tracker certificate linked to a basket of index futures. It compares this with a proposed approach for an equity-index tracker: project the underlying using a forward curve, then discount using a discount curve. The question suggests that, when those curves coincide, dividend yield and the certificate’s running fee affect value through opposing exponential adjustments, and asks what should replace dividend yield for futures exposure.

No answer or pricing derivation is included, so the proposed setup is not confirmed and the question remains unresolved. The text does not specify the certificate’s contractual payoff, futures basket weights, roll rules, fees, collateral terms, or market conventions. Those details could matter to a practical valuation, but the document provides no method for handling them or evidence comparing alternative approaches. It is useful as a statement of the modeling problem and assumptions to scrutinize, rather than as a complete pricing recipe.

Key ideas

  • The question concerns a tracker certificate linked to a basket of index futures.
  • It proposes a forward projection and discounting framework by analogy with equity-index trackers.
  • The author asks how futures exposure changes the role attributed to dividend yield.
  • The proposed valuation assumptions are not confirmed because the document contains no answer.

Tags

FuturesDerivatives pricing
Full text
# Pricing of a tracker certificate on basket of index futures


# Pricing of a tracker certificate on basket of index futures












i'm new to Quant Stack Exchange but i already saw that the quality of the answers is outstanding, however, i have a question for which i haven't found an answer yet:

I'm looking for a pricing model/ valuation approach for a tracker certificate on an underlying basket of index futures. I understand that the usual approach to price tracker certificates on equity indices is some sort of forward pricing approach, e.g. given a series of settlement dates in the future, you calculate the forward price given the current spot of the underlying (with a given forward curve) and then you discount this (given an appropriate Discount curve) to obtain the present value of the certificate.

Assuming your forward curve is equal to your discount curve, this means you are basically discounting using the dividend yield (e.g. Exp(-div * dt)) and the running fee (e.g. Exp(fee * dt)) (an increase in the div.yield reduces the price of the tracker but an increase of the running fees increases it). Is this so far correct?

I stumbled across a certificate where the underlying is not an equity index but a basket of index futures, thus as far as i understand this has to be treated as a future on a basket of futures (is this correct)? Can someone confirm this and if yes, what is the pricing approach to find the PV of this kind of tracker? By which expression do i need to replace the dividend yield? Furthermore, what kind of particular problems /issues might occur ?

Thanks a lot for your help

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.