Abstract

H A Lambrechts* The determination of the price of South African stock index futures contractst 1. Introduction it follows that the price at timet (the current time) of the Then The price or value of a futures contract is directly related to futures contract to mature on timeT on the above stock (de­ the price of the security or commodity which is expected to noted by FP(t,T)) would have to equal the current share price be delivered against an open futures position during the de­ (denoted by CP(t)). It is assumed that interest is compounded livery period. Futures prices are so influenced by the institu­ annually in arrears. Therefore, tional characteristics of the futures market where they are FP(t;T) = CP(t)(1 + r)<T-tl ... (1) traded (Kolb 1982: p101). where The general valuation principles which will be discussed in FP(t;T) = the price at timet for a futures contract with matur­ this introductory exposition are drawn mainly from the first ity at time T, aspect named above, ie the expected price of the deliverable CP(t) = share price at time t, instrument by using a relatively simple arbitrage relationship r = risk free annual effective interest rate (e.g. a