558 Part V: Index Options and Futures 
That is, he would buy back the ones he is short and sell the next series of futures. For 
S&P 500 futures, this would mean rolling out 3 months, since that index has futures 
that expire every 3 months. For the XMI futures and OEX index options, there are 
monthly expirations, so one would only have to roll out 1 month if so desired. 
It is a simple matter to determine if the roll is feasible: Simply compare the fair 
value of the spread between the two futures in question. If the current market is 
greater than the theoretical value of the spread, then a roll makes sense if one is long 
stocks and short futures. If an arbitrageur had initially established his arbitrage when 
futures were underpriced, he would be short stocks and long futures. In that case he 
would look to roll forward to another month if the current market were less than the 
theoretical value of the spread. 
Example: With the S&P 500 Index at 416.50, the hedger is short the March future 
that is trading at 417.50. The June future is trading at 421.50. Thus, there is a 4-point 
spread between the March and June futures contracts. 
Assume that the fair value formula shows that the fair value premium for the 
March series is 35 cents and for the June series is 3.25. Thus, the fair value of the 
spread is 2.90, the difference in the fair values. 
Consequently, with the current market making the spread available at 4.00, one 
should consider buying back his March futures and selling the June futures. The 
rolling forward action may be accomplished via a spread order in the futures, much 
like a spread order in options. This roll would leave the hedge established for anoth­
er 3 months at an overpriced level. 
Another way to close the position is to hold it to expiration and then sell out the 
stocks as the cash-based index products expire. If one were to sell his entire stock 
holding at the time the futures expire, he would be getting out of his hedge at exact­
ly parity. That is, he sells his stocks at exactly the last sale of the index, and the futures 
expire, being marked also to the last sale of the index. 
For settlement purposes of index futures and options, the S&P 500 Index and 
many other indices calculate the "last sale" from the opening prices of each stock on 
the last day of trading. For some other indices, the last sale uses the closing price of 
each stock. 
Example: In a normal situation, if the S&P 500 index is trading at 415, say, then that 
represents the index based on last sales of the stocks in the index. If one were to 
attempt to buy all the stocks at their current offering price, however, he would prob­
ably be paying approximately another 50 cents, or 415.50, for his market basket. 
Similarly, if he were to sell all the stocks at the current bid price, then he would sell 
the market basket at the equivalent of approximately 414.50.