Derivatives: Markets, Valuation, and Risk Management

CHAPTER 14

Stock Index Products: Futures and Options

Arguably the most exciting financial innovation of the 1980s was the development of stock index derivative contracts. Although derivatives on the Dow were contemplated by the Chicago Board of Trade (CBT) as early as the late 1960s, it was not until the early 1980s that index derivatives began trading. The Kansas City Board of Trade (KCBT) was the first by introducing the Value Line index futures in February 1982, and the Chicago Mercantile Exchange (CME) followed two months later with the S&P 500 index futures. On the options side, the CME launched trading in S&P 500 index futures options in January 1983, and the Chicago Board Options Exchange (CBOE) in S&P 100 index options in March 1983. Within a few years, stock index products began to appear on other major exchanges worldwide. The Sydney Futures Exchange (SFE) introduced the All Ordinaries index futures (options) in February 1983 (June 1985), the London International Financial Futures Exchange (LIFFE) the FT-SE 100 index futures (options) in May 1984 (October 1992), and the Hong Kong Futures Exchange (HKFE) introduced Hang Seng index futures (options) in May 1986 (March 1993). In spite of their relatively short history, the contracts have been a phenomonal success. Billions of dollars in equities change hands every day through index derivatives trading in nearly 30 different countries.

This chapter and the next focus on stock index derivatives product markets and portfolio ...