TAILIEUCHUNG - Lecture Derivatives: An introduction: Chapter 9 - Robert A. Strong
Chapter 9 - Stock index futures. This chapter presents the following content: Introduction, stock indexes and their futures contracts, uses of stock index futures, hedging with stock index futures. | © 2004 South-Western Publishing Chapter 9 Stock Index Futures Outline Introduction Stock indexes and their futures contracts Uses of stock index futures Hedging with stock index futures Introduction The fastest growing segment of the futures market is in financial futures In 1972, physical commodities comprised over 95 percent of all futures volume Today, physical commodities amount to only one-third of total futures volume Stock Indexes and Their Futures Contracts Stock indexes Stock index futures contracts The S&P 500 stock index futures contract Pricing of stock index futures Basis convergence Stock Indexes Introduction Capitalization-weighted indexes Introduction The S&P 500 index represents about 90% of all . stock index futures trading First published in 1917 Currently one of the Commerce Department’s leading indicators Capitalization-Weighted Indexes The S&P 500 index is capitalization-weighted Each of the 500 share prices in the index is multiplied by the number of outstanding shares in that particular firm Standard and Poor’s calculates the index by adding these figures and dividing by the index divisor Capitalization-Weighted Indexes (cont’d) Assume only three firms are in an index Assume the initial divisor is arbitrarily set at 2,700,000 Capitalization-Weighted Indexes (cont’d) Day 1 Index = 270,000,000/2,700,000 = Stock Shares Out Closing Price Shares x Price A 1,000,000 $10 10,000,000 B 5,000,000 $22 110,000,000 C 10,000,000 $15 150,000,000 Total 270,000,000 Capitalization-Weighted Indexes (cont’d) Day 2 Index = 271,000,000/2,700,000 = Stock Shares Out Closing Price Shares x Price A 1,000,000 $11 11,000,000 B 5,000,000 $20 100,000,000 C 10,000,000 $16 160,000,000 Total 271,000,000 Capitalization-Weighted Indexes (cont’d) Day 3 – B splits two for one Index = 262,000,000/2,700,000 = Stock Shares Out Closing Price Shares x Price A 1,000,000 $12 12,000,000 B 10,000,000 $11 110,000,000
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