Single stock futures values are priced by the
market in accordance with a theoretical pricing model based on a
formula:
Futures Price = underlying stock price X (1+
annualized interest rate - dividend)
Most of the time, single stock futures will trade
at a premium to the stock price adjusted for the broker loan rate. The
premium reflects the interest earned on the capital saved by not posting the
full value of the underlying stock. Since futures holders are not
entitled to collect dividends, the futures price must be adjusted downward by
the expected amout of dividend payments prior to expiration. In the case
where a large dividend payment is expected, the futures contract may
theoretically trade at a discount to the actual cash price.
A stock futures contract may not always trade at
the theoretically correct price due to a number of other market factors, such
as whether the underlying stock is difficult to borrow for covering short
trades.
