Futures pricing · Cost of carry
Futures Fair Value Explained: Cost of Carry and Basis
Fair value is a model-implied price built from spot, time and the benefits and costs of carrying the underlying exposure. It is a benchmark for comparison—not a promise that the quoted futures price must match the model tick for tick.
The direct answer
Fair value is a model price. The futures quote is a market price.
A fair-value calculation asks what a futures contract would be worth if a trader could compare it with an economically equivalent spot position after financing, income, storage and other carry effects. The live futures quote reflects that relationship plus current order flow, constraints, estimates and transaction costs.
Fair value
A theoretical price generated from stated inputs and a specified formula.
Futures quote
The price at which buyers and sellers currently transact for one contract month.
Basis
Commonly futures minus spot, although market convention must be confirmed.
Valuation gap
Observed futures price minus the fair-value estimate made with the same timestamp.
Interactive equity-index example
Build the fair-value estimate one input at a time
This calculator follows CME Group’s simple-interest teaching formula for stock-index futures. Values are hypothetical and do not pull live market data.
Model output
What the inputs imply
- Financing carry
- Calculated fair value
- Observed basis
- Observed vs fair value
The output is only as good as its timestamps, financing-rate choice, dividend estimate and day-count convention. It is not a trade recommendation, live quote or arbitrage guarantee.
Why the terms matter
Carry changes the price of waiting
Define the underlying cash price, index level, currency quote or physical location.
Financing, storage, insurance and other costs can raise the deferred value.
Dividends, foreign interest or convenience yield can offset those costs.
Carry accumulates only over the remaining time and under the contract’s actual terms.
That mechanism does not imply every deferred contract must be above spot. If the benefits of holding the underlying exceed financing and other costs, model value can sit below spot. A negative financing rate can also reverse an intuition built around positive rates.
The formula follows the underlying
Equity index, FX and commodity fair value are related—not identical
“Spot plus carry” is the shared idea. The economic inputs and practical constraints change by market.
| Market family | Starting point | Main carry inputs | What requires extra care |
|---|---|---|---|
| Equity index | Cash index level | Financing rate, dividends and time | The index is not a directly owned asset; dividend estimates and the final-settlement procedure matter. |
| FX | Spot currency pair | Interest rates in both currencies and time | Quote convention can invert the visual relationship. Match domestic and foreign rates to the quoted pair. |
| Physical commodity | Deliverable cash commodity | Financing, storage, insurance and convenience yield | Grade, location, seasonality, inventory access and delivery rules can make a generic “spot price” incomplete. |
Equity-index shortcut
Financing tends to lift fair value above the cash index; dividends not received by a futures holder tend to pull it back down. CME’s educational formula expresses dividends as index points expected before expiration.
FX interest-rate parity
For a currency quoted in U.S. dollars, the relationship reflects the opportunity cost of funding dollars and the interest earned on the foreign currency. Compare the exact quote convention before naming a premium or discount.
Commodity convenience yield
Immediate access to scarce inventory can have economic value. That benefit is not a posted invoice like warehouse rent, so a simple storage-cost estimate may fail during tight physical conditions.
Keep the comparisons separate
Basis measures a relationship; convergence describes how it changes
If futures are 6052 and spot is 6000, this convention produces a +52 basis.
If model fair value is 6052.50, the same 6052 quote is 0.50 below that estimate.
As expiration approaches, the time available to earn or pay carry shrinks. Futures and the applicable spot or final-settlement reference should converge under the contract design. “Converge” does not mean every intraday quote becomes identical well before expiration. Time mismatch, different trading hours, settlement methodology and temporary order imbalance can still create measured differences.
Why the live quote can disagree
A gap is a question to investigate, not free money
The cash value, futures quote, rates and dividend estimate may not describe the same instant.
Bid-ask spreads, fees, market impact and financing access create an arbitrage band rather than one frictionless price.
Expected dividends, storage costs, inventory benefits and funding rates can be estimated differently.
Short-sale restrictions, balance-sheet limits, borrow availability, position limits or delivery access can block the textbook trade.
The futures settlement reference may differ from the spot series displayed on a chart.
Urgent hedging and liquidity conditions can move a quote away from a simplified model temporarily.
Before using any fair-value number
Run a seven-question model audit
- 01
Which exact contract month? Time and settlement terms belong to a specific expiry.
- 02
Which spot reference? Use the cash index, currency quote, grade and location the model actually requires.
- 03
Are timestamps aligned? A stale cash close against a live futures quote is not a clean comparison.
- 04
Which rate and day count? State the financing source, compounding assumption and calendar convention.
- 05
Which benefits are subtracted? Dividends, foreign interest and convenience yield are not interchangeable.
- 06
What can actually be traded? Include spreads, fees, borrow, storage, delivery and balance-sheet constraints.
- 07
What would falsify the conclusion? Recalculate with plausible alternative inputs before calling a quote rich or cheap.
Continue with the next question
Fair value explains a benchmark—not the whole futures curve
This guide owns the model-price distinction, carry inputs, equity-index calculation and basis vocabulary. These pages take the neighboring questions further.
Primary references
Official sources and calculation scope
The definitions, formula, basis treatment and market-specific distinctions were reviewed against regulator and exchange sources on August 17, 2026. The calculator is a transparent teaching model, not a live pricing service.
- CME Group: Calculating Fair ValueSimple-interest stock-index formula and worked fair-value example.
- CME Group: What Is Equity Index Basis?Futures-minus-spot basis and the role of financing and dividends.
- CME Group: Understanding Stock Index FuturesCarry, fair value and cash settlement for stock-index contracts.
- CME Group: Reconciling FX Spot and Futures PricesQuote conventions and the two-currency interest-rate relationship.
- CME Group: Energy Calendar SpreadsStorage economics, inventories and convenience yield in physical markets.
- CFTC Futures GlossaryBasis, carrying charges, convergence, delivery and settlement terminology.
This page provides general market-structure education, not individualized investment, trading, legal, tax or arbitrage advice. Futures are leveraged and can produce losses beyond the amount deposited. Verify current exchange rules, market data, financing terms and broker requirements before making any decision.