Hi, I am recently came across some indices in which the forward prices are flat. So the forward price in 2015-is same as the price today.Why do people trade based on these indices-is it for dividend returns? The forward price is calculated based on the spot-future price parity relationship. Is there any other reason for having such indexes
To clarify the forward prices seem to be flat-because long & short constitutents are in equal measure.
So the rf interest rate = dividend rate. You might trade the forward (or futures) for tax reasons, convenience, transaction costs, avoid having direct impact in the underlier, privacy, probably a bunch of other reasons.
Thanks Joey. I got your point on transaction costs, avoid having direct impact in the underlier. But could you please clarify on the tax benefits from trading on this. Also if dividends are not taken for index return calculations-wont traders who trade on this get zero return.
For short term trading, futures gains are taxed at 40% short term gain, 60% long term. If you trade the index, and make a round trip in less than a year, you are taxed 100% short term. Short term taxes are generally higher, so your benefit to futures vs the underlying is basically (Trading Profit)*(60%)*(LT-ST tax rates) Of course if you’re a a tax exempt institution like a pension fund or an endowment, taxes don’t matter much.