Stock market index future


Stock market index future

In finance, a stock market index future is a derivative financial instrument.

Market

The global market for exchange-traded stock market index futures is notionally valued by the Bank for International Settlements at $221,200 million in 2005.

Uses

Stock index futures are used for hedging, trading, investments.

*Hedging using stock index futures could involve hedging against a portfolio of shares or equity index options.

*Trading using stock index futures could involve, for instance, volatility trading (The greater the volatility the greater the likelihood of profit taking – usually taking relatively small but regular profits.

*Investing via the use of stock index futures could involve exposure to a market or sector without having to actually purchase shares directly.

Please note the following cases of equity hedging with index futures:
*Where your portfolio 'exactly' reflects the index (this is unlikely). Here, your portfolio is perfectly hedged via the index future.
*Where your portfolio does not entirely reflect the index (this is more likely to be the case). Here, the degree of correlation between the underlying asset and the hedge is not high. So, your portfolio is unlikely to be 'fully hedged'.

Equity index futures and index options tend to be in liquid markets for close to delivery contracts. They trade for cash delivery, usually based on a multiple of the underlying index on which they are defined (for example £10 per index point).

OTC products are usually for longer maturities, and are usually a form of options product. For example, the right but not the obligation to cash delivery based on the difference between the designated strike price, and the value of the designated index at the "expiration date". These are traded in the wholesale market, but are often used as the basis of guaranteed equity products, which offer retail buyers a participation if the equity index rises over time, but which provides guaranteed return of capital if the index falls. Sometimes these products can take the form of exotic options (for example Asian options or Quanto options).

Pricing

Forward prices of equity indices are calculated by computing the cost of carry of holding a long position in the consituent parts of the index. This will typically be
* The risk-free interest rate, since the cost of investing in the equity market is the loss of interest
* Minus the imputed dividend yield on the index, since an equity investor receives the sum of the dividends on the component stocks. Since these occur at different times, and are difficult to predict, estimation of the forward price is something of an art, particularly if there are not many stocks in the chosen index.

Indices for futures are the well-established ones, such as S&P, FTSE, DAX, CAC40 and other G12 country indices. Indices for OTC products are broadly similar, but offer more flexibility.

See also

* Derivative (finance)
* SPI 200 futures contract


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Stock market index — A stock market index is a method of measuring a section of the stock market. Many indices are compiled by news or financial services firms and are used to benchmark the performance of portfolios such as mutual funds. Types of indices Stock market …   Wikipedia

  • Stock market bottom — A stock market bottom is a trend reversal that marks the end of a market downturn and the beginning of an upward moving trend. A bottom may occur because of the presence of a cycle, or because of panic selling as a reaction to an adverse… …   Wikipedia

  • Stock market crash of 1973–4 — The stock market crash of 1973–4 was a stock market crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom,cite journal |last=Davis |first=E. Philip |year=2003 …   Wikipedia

  • stock index future — A security that uses composite stock indexes to allow investors to speculate on the performance of the entire market, or to hedge against losses in long or short positions. The settlement of the contracts is in cash. Bloomberg Financial… …   Financial and business terms

  • Election stock market — Election stock markets (also referred to as election prediction markets) are financial markets in which the ultimate values of the contracts being traded are based on the outcome of elections. Participants invest their own funds, buy and sell… …   Wikipedia

  • Market timing — is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or… …   Wikipedia

  • Stock dilution — is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible… …   Wikipedia

  • Market capitalization — (often market cap) is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding (shares that have been authorized, issued, and… …   Wikipedia

  • Market trend — Statues of the two symbolic beasts of finance, the bear and the bull, in front of the Frankfurt Stock Exchange. A market trend is a putative tendency of a financial market to move in a particular direction over time.[1] These trends are… …   Wikipedia

  • Stock — For capital stock in the sense of the fixed input of a production function, see Physical capital. For other uses, see Stock (disambiguation). Financial markets Public market Exchange Securities …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.