Fair value spread is the difference between fair value and the current market price of the future contract. We have already understood the meaning of fair value and current future price. In our example of Sita and Noor, fair value of the house was Rs 1.03 crore and the current market price was Rs 1.1 crore, so the fair value spread would be – 70,000 (1.03 – 1.1).
Fair Value spread can be used to detect arbitrage opportunities in the market. A positive fair value spread highlights cash and carry arbitrage opportunity and a negative value indicates reverse cash and carry arbitrage opportunities. Read more about cash and carry arbitrage here.