Future vs. Basket

arccosinus · Post by **arccosinus** » Thu Feb 07, 2008 11:30 am

I am using Bloomberg's FUT_FAIR_VAL in Excel to get a fair value for the EuroStoxx 50-future (VG1). However, I consistently get the fair value higher than the market level of the future, meaning there is arbitrage selling the basket buying the future. So, I get a little suspicious that I'm doing something wrong. Do you have any experience of the FUT_FAIR_VAL in the BB DDE?

What I do is that I take the Bid/Offer-prices for the individual shares, multiply them by their price and the number of shares in the index and then divide by the divisor. I then add the FUT_FAIR_VAL from Bloomberg to get a fair bid and fair offer for the future (normally, these should "encapsulate" the bid/offer of the future, i.e. the spread on the basket is much bigger than the spread on the future in the market).

Do you know what the problem might be? I have checked my weights carefully.. Hence I suspect that there is an error in either rates or dividends or, perhaps, that there is a large cost of shorting some stocks - which could mean that the basket should trade a little higher..

Any help is appreciated!

ynot · Post by **ynot** » Thu Feb 07, 2008 11:42 am

"However, I consistently get the fair value higher than the market level of the future, meaning there is arbitrage selling the basket buying the future."

I made billions out of it. Didn't bother with the "selling the basket" leg though.

Jerome K.

FDAXHunter · Post by **FDAXHunter** » Thu Feb 07, 2008 1:24 pm

There's no reason to believe that the Bloomberg "Fair Value" is accurate, I don't think.

DocAdam7 · Post by **DocAdam7** » Thu Feb 07, 2008 2:02 pm

I haven't used that function in a while but I seem to remember it populating a dividend amount for you which you can change. My guess is that the marketplace's estimate of future divs is much different than bloombergs. What you can do is adjust the rates/divs until you bring the two values in line and then assess how realistic you think those values are... my guess is - given the methods most european companies use to determine their annual divs - the arb is less than you think. Remember, its not really a true mechanical arb since you haven't hedged your carry costs (unless you hedge the rate curve and can do div swaps on the index)...

Johnny · Post by **Johnny** » Thu Feb 07, 2008 6:57 pm

You need to include stock borrow fees too.

KangaXX · Post by **KangaXX** » Fri Feb 08, 2008 12:53 am

what is the typical implied breakeven repo rate on equity indicies? Ie in practice how much extra yield do you earn being long futures from an embedded shorting discount due to use as shorting instrument?

DocAdam7 · Post by **DocAdam7** » Fri Feb 08, 2008 12:16 pm

In practice I dont believe you earn any extra yield. Cash vs Future arb is a strategy that is so crowded that the only "edge" now is having faster systems to take advantage of incredibly short lived opportunities. If you're doing it manually than your game is over before it even starts.

autokor · Post by **autokor** » Wed Mar 05, 2008 3:07 pm

I think the answer is: Eurostoxx50 Return Index is reconed in a special way . BB just assumes similar to dj that you have to pay a certain percentage of dividend tax if you are not living in the countries of the several stocks. But as we know big banks have their offices in every european country . So they are everywhere "inhabitants". That means they actually pay no tax . That means that they will arb at a higher level of stock basket's price than bb 's fair value model including taxes. But there is a field in bb where you can change the assumption of the tax quote.