Derivatives: Valuation and Risk Management

By David A. Dubofsky; Thomas W. Miller Jr. | Go to book overview

CHAPTER 8

Stock Index Futures

Stock index futures contracts began trading on February 24, 1982, when the Kansas City Board of Trade introduced futures on the Value Line Index. About two months later, the Chicago Mercantile Exchange introduced futures contracts on the S&P 500 Index. By 1986, the S&P 500 futures contract had become the second most actively traded futures contract in the world, with over 19.5 million contracts traded in that year.1 In May 1982, the NYSE Composite Index futures contract began trading on the New York Futures Exchange. In July 1984, the Chicago Board of Trade, frustrated because Dow Jones & Company went to court to block its attempts to trade futures on the Dow Jones Industrial Average (DJIA), finally gave up and began trading futures contracts on the Major Market Index (MMI). The MMI was very similar to the DJIA. Finally, in June 1997, Dow Jones agreed to allow DJIA options, futures, and options on futures to begin trading. On October 6, 1997, futures on the DJIA began trading on the Chicago Board of Trade.

In their short history of trading, stock index futures contracts have had a great impact on the world's equity markets. Trading in stock index futures has allegedly made the world's stock markets more volatile than ever before. Critics also claim that individual investors have been driven out of the equity markets because institutional traders' actions in both the spot and futures markets cause stock values to gyrate with no links to their fundamental values. Many political figures have called for greater regulation, going so far as to favor an outright ban on stock index futures trading. Fortunately, such extreme measures have been avoided. Stock index futures have become irreplaceable in our modern world of institutional money management. They have revolutionized the art and science of equity portfolio management as practiced by mutual funds, pension plans, endowments, insurance companies, and other money managers.

A futures contract on a stock market index represents the right and obligation to buy or sell a portfolio of stocks characterized by the index. Stock index futures are cash settled. Thus, there is no delivery of the underlying stocks. The contracts are marked to market daily, and the futures price is set equal to the spot index level on the last trading day, leaving one last mark-to-market cash flow.

Figure 6.5 showed only some of the wide range of stock index futures contracts that trade globally, including those on the U.S., Japanese, French, British, German, and Australian stock markets. The most actively traded contract is the S&P 500 futures contract, traded on the CME.

We begin this chapter with a discussion of how different indexes are computed.


8.1 WHAT IS AN INDEX?

An index is, in one sense, just a number that is computed to allow measurement of the value of a portfolio of stocks. Other indexes have been constructed to track the values of securities of other

-190-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Derivatives: Valuation and Risk Management
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 646

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.