Stock market index future
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In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for International Settlements at US$130 trillion.[1]
Uses
Stock index futures are used for
There are cases of equity hedging with index futures. One case is where a portfolio 'exactly' reflects the index (this is unlikely) so that the portfolio is perfectly hedged via the index future. Another case is where a 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).
Pricing
Forward prices of equity indices are calculated by computing the cost of carry of holding a long position in the constituent parts of the index. This will typically be the
Indices for futures are the well-established ones, such as S&P 500, FTSE, DAX, CAC 40 and other G12 country indices. Indices for OTC products are broadly similar, but offer more flexibility.
See also
Notes
- ^ Bank for International Settlements: Table 23A: Derivative financial instruments traded on organised exchanges in Statistical Annex (The international banking market), page 108.
- ^ "Stock Market Futures". Day Trading Encyclopedia. Investors Underground. Retrieved 25 February 2017.