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Stock index future

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Stock index future
A Futures Contract on a stock index. Most are Cash-settled. The theoretical price of a stock index Future equals the cost of carrying the Underlying stock for that period: the opportunity cost of the funds invested minus any dividends. If the cost of buying and holding the Underlying stocks is less than the futures price, an arbitrageur can sell futures and buy the Underlying stocks.
The higher Interest rates are (compared with the Dividend Yield), the greater the opportunity cost of holding the stocks, hence the futures price should be higher than the current index price. If Interest rates are less than the Dividend Yield, the opportunity cost of holding stocks is less and the futures price should fall below the current index price. There is usually a so-called Arbitrage band in which, although the futures and Underlying prices diverge, it is not worthwhile arbitraging the two. This arises as a result of transaction costs from Bid-ask spreads, the market impact of buying and selling stock, and execution risks.
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