Fair Value in Futures Explained: How Futures Prices Are Actually Calculated
If you don’t know how fair value in futures works, you’re guessing. Futures prices are not random—they’re built from spot prices using interest, dividends, storage, and time. This is the cost-of-carry model, and every futures trader should understand it.
What “Fair Value” Means in Futures
Fair value is the theoretical price a futures contract *should* trade at given the cost to hold the underlying asset until expiration. The market doesn’t always match fair value perfectly, but it always trades around it.
This directly ties into contango vs backwardation, because fair value shapes the curve.
The Cost-of-Carry Formula
Here’s the actual formula, no fluff:
Fair Value = Spot Price + Carry Costs − Carry Benefits
Carry costs include:
- Interest (financing cost)
- Storage (for commodities)
- Insurance
Carry benefits include:
- Dividends (for equity index futures)
- Convenience yield (commodity supply tightness)
Fair Value for Equity Index Futures
For ES, NQ, YM, and other stock index futures, storage doesn’t matter—but interest rates and dividends do.
Equity index fair value formula:
F = S × e^{(r − d) × t}
You don’t need the calculus. All you need to know is:
- Higher rates → futures trade above fair value (more contango).
- Higher dividends → futures trade below fair value.
- Time to expiration magnifies the effect.
Commodity Fair Value
Commodity fair value leans heavily on storage and transportation. Oil, natural gas, grains, metals—physical stuff has real costs to hold.
| Commodity | Main Carry Cost | Main Carry Benefit |
|---|---|---|
| Crude Oil | Storage + financing | Low convenience yield |
| Natural Gas | High storage | Seasonal convenience yield |
| Grains | Storage + insurance | Supply availability |
Why Futures Deviate from Fair Value
Futures won’t always match theoretical fair value tick-for-tick. Short-term moves distort everything. But arbitrage traders keep the difference in check.
The main reasons for deviation:
- Volatility spikes
- Liquidity gaps
- News shocks
- Hedge pressure from institutions
Why Fair Value Matters to You
Fair value helps you understand *why* a futures contract is priced where it is—not just what price it shows on the screen. This matters for rolls, spreads, and avoiding dumb assumptions about spot vs futures.
Practical uses for traders
- Knowing when a contract is “rich” or “cheap.”
- Understanding roll yield before rolling.
- Spotting when spreads get out of line.
- Avoiding confusion when futures diverge from spot price.
The Bottom Line
Fair value in futures is the backbone of how contracts are priced. If you know the cost-of-carry model, you understand why the market trades at a premium or discount—and you avoid getting fooled when futures drift away from spot. Futures follow math, not magic.