Fair Value Index

The fair value index is a benchmark price used in derivatives trading to represent the theoretical value of an asset, often calculated as the spot price plus the cost of carry. It is used to determine the premium or discount of a derivative contract, such as a futures contract, relative to the underlying spot asset.

If the futures price deviates significantly from the fair value index, it may indicate an arbitrage opportunity or a shift in market sentiment. Traders use the fair value index to make informed decisions about whether to go long or short on a derivative.

It is also used by exchanges to calculate the funding rates for perpetual futures, which help keep the derivative price aligned with the spot price. The index is essential for maintaining the integrity of the derivative market and preventing prolonged divergence between spot and derivative prices.