SIDEBAR: CALCULATING PREMIUM FAIR VALUE
A risk-averse investor wants to invest in the stock market. How does he do it without risking loss? He can borrow funds, buy a portfolio of stocks equivalent to the S&P 500 index at the price of S and simultaneously sell a S&P futures contract at a price of F. He has achieved a hedged position that is totally riskless, any depreciation in stock prices being compensated by a decrease in the value of the
futures he sold.