Industry experts feel that pricing a stock index future is similar to pricing interest rate futures contracts in that it relies on a type of cash and carry trade.

It is this cash and carry trade that determines the fair value of the futures contract relative to the underlying index.

The logic being, for an investor to be indifferent to owning futures contracts, or stocks, in exact numbers and proportion to the index, price of the futures contract should equate the price of buying and carrying such stocks from the stock settlement date to the maturity contract date.

Since the financing costs associated with borrowing money to purchase the stocks is usually higher than the dividend yield from these stocks, obviously there is a cost of carry element involved in owning the equity.

Hence, the fair value of a futures contract is usually higher than the price of the underlying index, to the extent of the cost of the carry element. This cost of the carry premium could be written as:
Index value x (financing rate - dividend yield) t

Where t is the proportion of the year from the stock settlement date to the maturity value of the futures contract.

This can be illustrated by a simple example.

Index level = 5000
Dividend yield = 4%
Interest rate = 10%
Period of carry = 90 days
Cost of carry = (5000 x (10% - 4%))x90/365 = 73.9 points
Fair value of futures contract is 5000 + 73.9 = 5073.9 points.

Thus, for instance if the index on January 1, 2000 had quoted at 5000 points, the three-month futures contract would be at 5073.9 points. The arbitrageurs and speculators then according to the cost of funds and market sentiment would alter the index.

The futures contract would then not fall below the index in any efficient market as the arbitrageurs step in to buy.