The futures price of an asset is determined using the concept of 'cost of carry
Economics of Trading Futures under the Cost of Carry Model
One such market is single stock futures and, as OneChicago states, prices should equal their net cost of carry value.
In all cases, the perfectly hedged portfolio will earn the risk-less (net) cost of carry return.
In a pure cost of carry, gross returns in the futures market are independent of the expiration month.
For single stock futures, prices equal their net cost of carry value:
where [pi], ([P.sub.t+1] - [P.sub.t]),[C.sub.St] , and ([F.sub.Tt+1]- [F.sub.Tt] denote the portfolio's profit, the change in the spot price, the spot asset cost of carry, and the change in the maturity-date-T futures contract price, respectively, from time t to t+1.
Despite the similarities noted above, the cost of carry and ECM disequilibrium interpretations are incompatible.
However, reinterpret the spot price as the spot price inclusive of the cost of carry to the futures contract maturity in Equation (4) and denote this version as the MECM.
The cost of carry is the interest on the spot price compounded for the period of the hedge at the yield-to-maturity of the approximately two week-to-maturity T-bill (reported in the Wall Street Journal).
It should be applied as the MECM where the spot price is inclusive of the cost of carry to the futures contract maturity.
If, in those circumstances, there are large short positions in the market, it is likely that one or both of the following will occur: First, the price of the securities in question will rise relative to close substitute securities, or, second, the financing cost of the securities in the repurchase agreement (RP) market will drop, thereby providing the owners of those securities with a very favorable cost of carry
. When this latter condition occurs, the particular security is said to be "on special" in the RP market.