What is the move relative to the 5,020 futures reference?
Reveal the worked answer
25 points.
The raw cash gap includes carry and timing.
Equity Index Futures · FUT-04 · Core
Price discovery versus prediction
Why can futures react before the cash market?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: What is an equity index future?
When the main cash market is closed, an accessible futures venue can incorporate new information first. That is early price discovery, not a forecast guaranteed to survive the next session.
When linked venues are open, information can arrive through several channels and arbitrage connects economically comparable prices.
Understand the mechanism
A cash close is a historical observation; an overnight future is a current quote for a dated contract. Carry and timestamp differences mean their raw level gap is not a clean market return.
Broad news may move futures quickly. Company-specific information can first appear in shares or another venue. Leadership depends on liquidity and the information being traded.
Walk through the process
Record the contract, quote time and appropriate fair-value reference. Use synchronized comparisons where possible. At the cash open, observe whether additional participants accept or reject the overnight repricing.
Do not treat a futures gap as a promise of the regular-session direction or close.
Operational boundary
All prices, portfolio values and account balances are fictional. Real contract calendars, broker requirements and available liquidity must be checked for the instrument actually traded. The example's mathematical hedge or payoff is not an execution guarantee.
A worked example
Cash last closed at a fictional 5,000 while the relevant futures fair-value reference was 5,020. Overnight the same future reaches 5,045. Its move relative to that reference is 25, not the full 45-point cash/futures gap.
The graph follows the futures contract's own observations. The eventual cash opening can still add information and reverse the first reaction.
Price discovery versus prediction—worked comparison
Vertical: Futures level
Horizontal: Quote observation
1. Fictional example
Read the graph as a data table
| Quote observation | Fictional example |
|---|---|
| 1 | 5,020 |
| 2 | 5,028 |
| 3 | 5,035 |
| 4 | 5,045 |
| 5 | 5,038 |
What would invalidate the reading?
Comparing stale cash with a different futures month manufactures divergence. Treating the overnight sign as certainty ignores new liquidity.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Comparing stale cash with a different futures month manufactures divergence. Treating the overnight sign as certainty ignores new liquidity.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Why can futures react before the cash market? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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