Chapter 10: Stock Index Futures

Key Concepts

Stock Index Futures:
- Futures contracts that allow trading based on the value of stock indices.
- Use a multiplier (e.g., $250 per index point) to calculate the contract's total value.
Multipliers:
- Act like contract size.
- Convert index value into the contract value by multiplying by the given multiplier.
- Examples: S&P 500 multiplier is $250 per point; mini contracts might use $50 per point.

Non-Systematic Risk:
- Individual stock risk, can be reduced by diversification.
- Relates to specific company and industry risks.
Systematic Risk:
- Overall market risk that affects all equities.
- Cannot be eliminated through diversification.
- Hedged using stock index futures to protect a diverse portfolio from market downturns.

Effective for managing systematic risk in a diversified portfolio.
Futures contracts are cash settled, not physically settled like commodity futures.

Scenario:
- Buy 3 S&P 500 futures contracts.
- Multiplier: $250 per index point.
- Initial Margin: $66,000 per contract.
- Maintenance Margin: $60,000 per contract.
- Contract purchased at 2,833.30 points, settled at 28.25.80 points.
Calculation Steps:
- Determine loss per contract:
  - Loss of 7.12 points.
  - Multiplier conversion: 7.12 x $250 = $1875 loss per contract.
- Calculate equity per contract:
  - Initial margin ($66,000) - Loss ($1875) = $64,125.
- Total equity for 3 contracts = $64,125 x 3 = $192,375.
Alternative Calculation:
- Total margin deposit = $66,000 x 3.
- Total loss = $1875 x 3.
- Subtract total loss from total margin deposit for total equity.

Scenario:
- Customer with large blue-chip stock portfolio anticipates market decline.
- Portfolio value: $5 million.
- Current Futures Price: $29.95.20; Multiplier: $250 per point.
Hedging Calculation:
- Contract value = $29.95.20 x $250 = $748,800 per contract.
- Number of contracts needed = $5 million / $748,800 = 6.6774.
- Round down to 6 contracts for hedging purposes.