# Price discovery versus prediction

**FUT-04 · Equity Index Futures · Core**

**Lesson question:** Why can futures react before the cash market?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUT-01

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.

## Graph: Price discovery versus prediction—worked comparison

**Horizontal:** Quote observation  
**Vertical:** Futures level

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/equity-futures/FUT-04.js` and displayed as an accessible table in the HTML lesson.

## 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

### What is the move relative to the 5,020 futures reference?

**Answer:** 25 points.

**Why:** The raw cash gap includes carry and timing.

### What is the critical failure to avoid?

**Answer:** Comparing stale cash with a different futures month manufactures divergence. Treating the overnight sign as certainty ignores new liquidity.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: Why can futures react before the cash market? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [CME Introduction to Futures](https://www.cmegroup.com/education/courses/introduction-to-futures)

- [CME Micro E-mini overview](https://www.cmegroup.com/education/courses/micro-e-mini-futures/micro-e-mini-futures-products-overview)