December 2019
Beginner
912 pages
28h 36m
English
Content preview from Derivatives
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CHAPTER 5Index Futures
Aims
- To provide details of contract specification, settlement procedures and quotes for stock index futures contracts.
- To demonstrate index arbitrage and program trading using stock index futures.
- To price a stock index futures contract, when stocks which make up the cash market index (e.g. S&P 500), pay discrete dividends.
- To determine the number of futures contracts to use when hedging various cash market positions (e.g. a portfolio of stocks or holding barrels of oil).
- To outline the risks which remain, after hedging with index futures.
- To demonstrate ‘tailing the hedge’.
Stock index futures (SIF) are contracts whose price depends on an underlying stock market index such as the S&P 500, FTSE 100 or Nikkei 225 indices. Such futures contracts are widely used in hedging, speculation, and index arbitrage.
In a well-diversified portfolio of stocks, specific (idiosyncratic) risk of individual stocks has been largely eliminated and only ‘market’ (‘systematic’ or ‘non-diversifiable’) risk remains. Stock index futures can be used to eliminate this ‘market risk’ of the portfolio of stocks. In ‘normal times’ a fund manager might be quite happy to hold a diversified portfolio of stocks even though they are risky. But if a fund manager believes the market will become increasingly volatile over the next 3 months (i.e. could rise or fall substantially) and she wished to remove this uncertainty, she could sell stock index futures to eliminate the market risk. At the ...
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I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.