The cost of carry for stock indicies has four variables that determine the futures price. They are spot price, risk-free rate, dividend rate, and time to maturity. The spot price and expected dividends for both contracts are the same, so there are really only two variables to consider (Rf and Div).Quote from gnome:
OK you guys, let's work this out.
1. The Jun could be showing last trade -100 from March, but only because the Jun is so thinly traded and its pricing is just lagging the front month.... you know, the Mar was bid up a bit, but there was no corresponding play on the Jun? If you tried to actually buy it there, maybe fill 150 higher??? Beside, you already know thin markets may not reflect current value accurately.
2. On Hee-Haw they show "fair value" for the Mar at -100 ish. Considering the cost of carry, I don't understand why it would be a negative number... and as it doesn't really matter to trades, I handn't given it any thought. (Now that I have, I still don't know why "fair" would trade at a discount to cash. Do you?)
For the March contract to trade at a discount to the June contract, the Rf rate has to be LESS than the expected dividend rate. If you say that the fair value of the June contract is less than the March contract you are implying that the Rf rate is less than the expected divs.
F = Se^((Rf-div)*T) Try it in Excel.
This makes sense because the dividends are a "cost" to holding the contract (since you don't get them), while the Rf is the "benefit" (since you don't pay it). If the June contract is cheaper than the March contract then the cost (dividends not received) are greater than the benefits (interest payments avoided).