Interest in Index Futures

learner2007

learner2007

Would someone be so kind as to explain what
the interest that is figured into the index futures
price represents.

Thank you very much,
learner
 
>makloda

Thank you. But I should have been clearer with my
question.

For example, does the interest represent what the
buyer would pay up until the expiration date to borrow
the funds to purchase the shares ? Or could it be
what the seller would have received in interest up
until the expiration date on the funds from the
immediate sale of the shares?
Or, ....?

Thank you again,
learner
 
Quote from learner2007:

>makloda

Thank you. But I should have been clearer with my
question.

For example, does the interest represent what the
buyer would pay up until the expiration date to borrow
the funds to purchase the shares ? Or could it be
what the seller would have received in interest up
until the expiration date on the funds from the
immediate sale of the shares?
Or, ....?

Thank you again,
learner
More...

When you buy an equity index futures contract you do not pay today* - you pay on expiration whatever the spot price is then. So the cash you theoretically set aside to pay on delivery is still yours, earning interest until then (assume at the risk free rate). The alternative is to buy the equivalent value basket of equities at spot, in which case your cash is gone but you get the dividends.

*The exchange requires that you put up margin and your position is marked to market daily.
 
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