Definition of Stock Index Futures
A stock index future can be defined as a futures contract where the underlying asset is a stock index. A futures contract is an agreement between two parties to purchase an asset at a fixed price and at a later date. Futures contracts are traded on a futures exchange and are subject to a daily settlement to guarantee to each party that the claims against the other party will be paid. Stock index futures are settled through cash.
Other People Are Reading
-
Structure
-
Stock index futures are based on the indices of common stock. The indices, such as S&P or the Dow Jones, are not traded directly, but are traded only through futures contracts.The settlement of the contracts is based on cash and not the actual delivery of stock certificates.
Value
-
Stock index futures trade in terms of number of contracts. The dollar value of a stock index futures contract is calculated using the quoted futures price and multiple. The contract's multiple is a dollar amount fixed by the index.
-
Value Equation
-
A simple equation used to calculate the dollar value of a stock index futures contract using the quoted futures price and quoted multiple is as follows: dollar value of a stock index futures contract equals futures price times the multiple.
Daily Settlement
-
At the end of each trading day, the individual losses and gains on a stock index futures contract are credited or debited by the exchange to the trader's account. This is called the "daily settlement" procedure. The investor is required to have enough cash in the account to fund these daily variations.
Margin Requirements
-
The exchange requires cash margins to be maintained by the investor to fund the daily trade variations. This includes an upfront "initial margin" amount and a "maintenance margin," which is a minimum level of cash that the account should have until the contract is settled.
-
