Spot Price vs Futures Price

[Davidee]

Right now the sport price for buying an S&P 500 contract is 1,347.7 a July 2011 Futures contact is 1,344.3 and a Sept 2011 is 1,339.0 to buy.

What are the reasons for such big differences and what (useful) conclusions can we draw from it? The prices should settle at the spot price on the day, surely the market expects the S&P to fall before now and July/September right? Is the market usually right or wrong?

 

[gc1]

... what (useful) conclusions can we draw from it? ...

What the implied USD interest rate is for the period from now until the settlement day of each futures contract.

 

[Martinghoul]

It's not about expectations of the index moving per se. It's just carry (incl divs).

 

[meanreversion]

I always find it ironic when currencies respond to potential rises in interest rate. For example, the EUR recently benefited after hawkish comments from Trichet. Thus the future value of the EUR becomes more discounted, but because the market wants "yield", the currency goes higher. In a funny way, this implies that the forward value is an INVERSE indicator of what might happen to spot.

 

[Martinghoul]

There's a VERY interesting paper by Andy Haldane of the BoE on (kinda) this subject. He's generally a really good guy and publishes very very interesting results.

 

[meanreversion]

Speaking of the BoE, are they really "hinting" at rate rises, is the market getting ahead of itself here? Surely the curve ball here is a decent correction in commodity prices, at which stage inflation will fall off a cliff.

 

[anley]

There are never any useful conclusions to get from the spot v futures differential. 99% of the time they're arbed to perfection.

Just accept the futures price is always perfect and try to determine whether it's going up or down as that's where the money is to be made, not thinking about whether futures are or aren't fair value because even if you think they're undervalued there's nothing you can do, and nothing that's going to help you make a return.

Good luck!

 

[Martinghoul]

Speaking of the BoE, are they really "hinting" at rate rises, is the market getting ahead of itself here? Surely the curve ball here is a decent correction in commodity prices, at which stage inflation will fall off a cliff.

Well, firstly, I think it's a shot across the bow of the wage negotiatiors, who are quite busy right now (hence the pinch of Merv's extra special hawkish sauce). Secondly, I guess they just showed that they weren't happy with the mkt pricing out the hikes to the extent it did.

 

[new_trader]

There are never any useful conclusions to get from the spot v futures differential. 99% of the time they're arbed to perfection.

Just accept the futures price is always perfect and try to determine whether it's going up or down as that's where the money is to be made, not thinking about whether futures are or aren't fair value because even if you think they're undervalued there's nothing you can do, and nothing that's going to help you make a return.

Good luck!

You don't think it's useful to know about contango and backwardation and how these conditions arise? You are aware that there are people who are interested in more than short-term up and down price movements based on "set-ups"...or whatever...