It seems that general sentiment on the long term trend of the US stock market is currently bullish, fuelled by a strong dollar and falling oil prices.

Why then are the long term futures (MAR 2016) for e -mini S&P trading at a discount to the current price? i.e Why is the Mar 2016 futures price less than the mar 2015 price?

The data is here :http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500.html

  • 2
    I was going to type in an answer, but rhaskett beat me to it. I'll just give you a couple helpful links I found instead: link 1 (see page 3 about "positive carry"), link 2
    – 7529
    Commented Feb 5, 2015 at 21:30
  • What do you think is bullish?
    – BAR
    Commented Feb 6, 2015 at 23:39

1 Answer 1


This is a great question for understanding how futures work, first let's start with your assumptions

  • Actually, a strong dollar is not generally that great for the US stock market. The main reason is many US companies trade internationally and a strong dollar will in general make their exports more expensive and therefore less competitive.
  • Also, falling oil prices, while great for the US consumer, are not necessarily good for the stock market as we import similar-ish amounts as we export. Especially when the price of oil changes mainly due to the price of the dollar, lower oil prices can be bad for the stock market for the reasons above.

The most interesting thing here is that neither of these things really matters for the price of the futures. This may seem odd as a futures contract sounds like you are betting on the future price of the index, but remember that the current price already includes the expectations of future earnings as well!

There is actually a fairly simple formula for the price of a futures contract (note the link is for forward contracts which are very similar but slightly more simple to understand). Note, that if you are given the current price of the underlying the futures price depends essentially only on the interest rate and the dividends paid during the length of the futures contract. In this case the dividend rate for the S&P500 is higher than the prevailing interest rate so the futures price is lower than the current price. It is slightly more complicated than this as you can see from the formula, but that is essentially how it works.

Note, this is why people use futures contracts to mimic other exposures. As the price of the future moves (pretty much) in lockstep with the underlying and sometimes using futures to hedge exposures can be cheaper than buying etfs or using swaps.

Edit: Example of the effect of dividends on futures prices

For simplicity, let's imagine we are looking at a futures position on a stock that has only one dividend (D) in the near term and that this dividend happens to be scheduled for the day before the futures' delivery date. To make it even more simple lets say the price of the stock is fairly constant around a price P and interest rates are near zero. After the dividend, we would expect the price of the stock to be P' ~ P - D as if you buy the stock after the dividend you wouldn't get that dividend but you still expect to get the rest of the value from additional future cash flows of the company.

However, if we buy the futures contract we will eventually own the stock but only after the dividend happens. Since we don't get that dividend cash that the owners of the stock will get we certainly wouldn't want to pay as much as we would pay for the stock (P). We should instead pay about P' the (expected) value of owning the stock after that date.

So, in the end, we expect the stock price in the future (P') to be the futures' price today (P') and that should make us feel a lot more comfortable about what we our buying. Neither owning the stock or future is really necessarily favorable in the end you are just buying slightly different future expected cash flows and should expect to pay slightly different prices.

  • 1
    Thanks. But how come the futures price only considers interest and dividends and completely ignores the possibility of the general appreciation of the underlying. By this token, the futures price is completely independent of whether the market is in a bullish or bearish phase. How can that be? Is it because "current price already includes the expectations of future earnings as well"?
    – Victor123
    Commented Feb 5, 2015 at 21:24
  • Exactly, think of the current price of the stock as the (discounted) sum of all the future value you will get from owning the stock. Similarly, the future contract is the sum all the value you will get in owning the stock if you started owning it at a future date (note you miss a few dividends in this case which is why near term dividends matter). If the market is bullish and thinks the future value of owning the stock is high note that both owning the stock and owning the future look very good for you in that case and therefore both the future and the stock will go up in price.
    – rhaskett
    Commented Feb 5, 2015 at 21:33
  • And your question asked about the futures price relative to the current price. Note the only (major) difference here is that you miss a couple dividends by owning the future instead of the stock so the price of the future is a little lower than the stock price.
    – rhaskett
    Commented Feb 5, 2015 at 21:46
  • Thanks again. What I am not getting is: When I own the underlying, I may get dividends , but that also reduces the price of the underlying. So how is owning the stock favorable comapred to owning the futures from a purely dividend perspective, assuming interest rates are negligible.
    – Victor123
    Commented Feb 6, 2015 at 16:40
  • did the edit help?
    – rhaskett
    Commented Feb 8, 2015 at 9:18

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