Stock index futures - The first stock index contracts were traded at the Kansas City Board of Trade on February 24, 1982. This introduction was followed (the same year in April) by the Chicago Mercantile Exchange (CME). These new contracts were based on the S&P 500 index. These two brand new contracts turned out to be very successful and was appreciated by most institutional investors. Since then, most of the financial markets all around the world offer futures on their indexes.
Definition of a stock index - "An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index."
[...] -The other solution was to buy some S&P 500 futures contracts. We checked on the Chicago Mercantile Exchange website and we found the following table showing us the different futures contracts and terms: CME S&P 500 Futures Pit-Traded prices as of 04/27/06 01:10 pm (cst) MTH/ SESSION PT EST PRIOR DAY STRIKE OPEN HIGH LOW LAST SETT CHGE VOL SETT VOL INT JUN +770 36K 646726 SEP + 11922 DEC06 1340.50 B 1324.50 A 1339.50 B + 2133 MAR07 1351.70 B 1335.70 A 1350.70 B + 63 JUN07 1362.70 B 1346.70 A 1361.70 B + 52 SEP07 1373.70 B 1357.70 A 1372.70 B + 1 DEC07 1384.70 B 1368.70 A 1383.70 B + 2 MAR08 1395.70 B 1379.70 A 1394.70 B + TOTAL EST. [...]
[...] Specifications of the stock index futures Unlike some futures contracts such as commodities' futures, stock index futures are cash settlement contracts. Because the delivery of a stock index is not possible, the position is settle in cash at maturity. Each index has its own contract's specifications; we will be focused for this report on the CME® S&P 500® futures contracts. d. The S&P 500 index The Standard and Poor's Corporation introduced the S&P 500 Index in 1957, since then it have regarded as the world benchmark for equity market. [...]
[...] Stock index futures can decrease the exposure on stocks movements whatever the length is (from one day to several years) and so that the investor does not have to sell off his stocks because the futures reduce the exposure to stocks' prices. In other words, the future market will allow the transfer of price risk from hedgers to speculators. The margining system of these future markets, allow the participants, to enter in the market without a large capital. Stock index futures are an effective risk management tool used by traders, money managers, pension fund managers and individual investors. [...]
[...] Profit & Losses: Value of our portfolio in April: $ Value of our portfolio in Dec.: $ @ Total= Value of S&P 500 futures contract in April: $669,750 Value of S&P 500 futures contract in Dec.: $589,365 ( @ $250@ Short our hedge= +$80,385 Hedged portfolio: Loss on portfolio: Gain from short our futures hedged: 80,385 Gain= $ In that case, we gain $ because we took the choice to over hedge our portfolio. If we hadn't bough a futures contract, we would have lost $ which is a huge amount compared to the gain we do. [...]
[...] A futures contract based on the S&P 500 may not be suitable for your hedging. On the following graph and table, you can see how our portfolio is composed and diversified: Initial investment Net value (01/05/2006) Company name Quantity Start First value Date Spot Valuation at price price the spot price $ Then, in order to cover our portfolio, we decided to hedge to cover its risk. In fact, thanks to technical analysis, we identified that in a future time, the market price of our portfolio may decrease between and 10%. [...]
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