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How does the futures price track with the price of the underlying security?
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.
