Bob's Daily Buzzword: `Fair Value'

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Aug. 21 (Bloomberg) -- Bob Rice, general managing partner with Tangent Capital Partners LLC, explains "Fair Value." (Source: Bloomberg)

? welcome back, time for our daily buzzword for your vocabulary.

Bob this year from tangent capital partners.

This is from a hot topic list you have been getting?

We have done this a few times.

To understand why fair value is important, you understand . first you need to know the futures contract.

It is indeed a contract to buy or sell a stock or specific security in the future.

The price is determined right now.

You can determine it as moving the settlement date from today into the future.

The only difference between those numbers ought to be the time value of money.

Speaking of, do you care if you buy the stock on this particular day?

The idea of fair value is that it is the price of that futures contract that makes you indifferent to whether you buy it today for cash or in the future under the contract.

The difference will be the time value of money.

When you look at fair value on bloomberg, as you would think, it is based on yesterday's close.

Why is it a trick at all?

What does it matter?

The trick is that the futures contracts trade basically 24 hours per day.

Obviously, the stock market only trades when it is opened.

The fair value will be pegged to yesterday's closing stock price.

But the actual value of the futures contract is constantly being read determined.

So, you are an individual investor sitting at home, and trying to work this all out, this is really not something you should try to trade off of, right?

Know, the high-frequency guys will be milliseconds ahead of you, but if it tells you that these contracts are trading below fair value, the only thing that rationally means is that futures traders are expecting it

This text has been automatically generated. It may not be 100% accurate.

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