When Futures is higher than its Underlying Index

[Jeffrey K.W. Lo]

From what I understood from my novice studies, the "appropriate" price for an index futures is the discounted index's price minus the dividends foregone by holding the future, and the difference in the prices is called the "basis".

But once in a while we see that the closing price of the futures is actually higher than the index (sometimes by quite a bit), does anyone know reasons as to why index arb traders are allowing this?

The one factor that I can think of is the transactions cost with "Longing the index" which might be costly, but are there other reasons why?

Thank you all in advance.

Jeffrey

 

[darth]

Futures price = Index + cost of carry

Many Indices ( e.g., dax) are total return index ..so their basis is always positive. For them Futures = FV (index)..

 

[latency]

are you comparing the closes at the same time, in the US, the index closes are at 3 cst while the futures close at 3:15 cst