A: Fair value, in the case of stock index futures such as the Value Line, is the theoretical value of a futures contract as compared to the price of the underlying cash index, based on the prevailing level of short-term interest rates and dividend yields. The price of a futures contract generally fluctuates around fair value, but over time it generally returns to equilibrium at or near that price level. However, the actual value of any futures contract or spread/straddle is determined by supply and demand in the open market and may, at any given time, vary substantially from its theoretical fair value.

Q: How is fair value calculated?

A: The formula used on this site for calculating fair value:

VLA*[1%+(T-bill rate - Value Line Investment Survey estimated median yield)]*(Calendar days until futures expiration/360)

For example, let's calculate the fair value for the June Value Line futures contract for Monday, March 15, 1999. The following are the terms of the equation and their example values:

Value Line Arithmetic Index (VLA): 898.32 (closing price of the Value Line Arithmetic Index on Friday, March 12, 1999)

T-bill rate: 4.57% (interest rate, as listed in the Wall Street Journal, of the U.S. Treasury bill closest in maturity to the June Value Line futures contract expiration)

Value Line Investment Survey estimated median yield: 2.0% (from "The Value Line Investment Survey," published weekly by Value Line Inc., which gives the median -- net 12 months -- of the estimated dividend yields of all dividend paying stocks under review by Value Line)

Calendar days until futures expiration: 96 (the number of calendar days -- including weekends and holidays -- to expiration of the June Value Line futures contract. Because the Kansas City Board of Trade calculates fair value for the Value Line before the start of each trading day, the number of days to expiration includes the day for which the fair value is being calculated. Since Value Line futures expire at the close of trade on expiration, expiration day is also included in the number of days to expiration.)

Plugging the example numbers into the formula yields:

898.32*[1%+(4.57%-2.0%)]*(96/360) =

898.32*[.01+(.0457-.02)]*(.2667) =

898.32*[.01+.0257]*(.2667) =

898.32*[.0357]*(.2667) =

8.55 or 855 basis points

Q: What is a basis point?

A: A basis point, as the term applies to the Value Line Arithmetic Index and Value Line futures, is 1/100 (.01) of a "whole" or "full" or "index" point. The minimum price move for the Value Line Arithmetic Index is 1 basis point; the minimum price move for Value Line futures is 5 basis points.

The price of the Value Line Arithmetic Index and Value Line futures is usually quoted in whole points instead of basis points (i.e. 905.50 rather than 90,550).

Basis points are often used to express price changes and differences. For example, if the price of the Value Line Arithmetic Index went from 905.50 to 905.80, that would be a 30 basis point move. Use of basis points, however, is not limited to expressing price changes that are relatively small. You might hear, for example, that Value Line futures were up "1,000 points on the day." The price rose 10 index or whole or full points that day, equivalent to 1,000 basis points.

Value Line® is a registered mark of Value Line, Inc., a New York corporation that provides financial services and publications. Since 1982, the Kansas City Board of Trade has been licensed to use the Value Line® mark in connection with its efforts to establish futures markets tied to the Value Line® index. The Kansas City Board of Trade and Value Line, Inc. are not affiliated corporate entities.