Clearing and Settlement of Derivatives

Alternatively the fund manager can use derivatives, in this case

index futures, to gain and reduce exposure to the respective markets.

They will sell S&P Index futures contracts and purchase Nikkei

Index futures.

If they are correct in their assumptions the sale of the S&P futures

will offset the fall in price of the US stocks they hold whilst the Nikkei

futures will rise enabling the fund to participate in the increase.

There are several advantages for the fund manager.

• The futures transactions are very quick to effect and there is less

commission. Typically it might be 2 per cent for equities against

say 0.2 per cent for futures. ...