Table of contents for Stock index futures / Charles M. S. Sutcliffe.


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PART 1 - PRELIMINARIES
1. Stock Market Indices                                             3
1.1 The Need to Measure Market-wide Price Movements              3
1.2 Types of Stock Market Index                                  4
1.3 Computation of Stock Market Indices                          6
1.4 Comparison of Geometric and Arithmetic Stock Market Indices  7
1.5 Details of the Computation of the FTSE 100 Index            11
1,6 Some Major Stock Market Indices                             12
1.7 Problems with Stock Market Indices                          12
1.8 Conclusions                                                 17
2. Introduction to Futures Trading                                 19
2.1 Forward and Futures Contracts                               19
22 The Mechanics of Futures Markets                             20
2.3 Interpreting the Financial Times Daily Reports              33
2.4 Payoff from a Forward Contract                              34
2.5 Definition of Returns                                       35
2.6 Distribution of Price Changes or Returns                    39
2.7 Classification of the Trading Process                       40
2.8 Comparison of Forward and Futures Markets                   42
2.9 Some Advantages of Stock Index Futures                      43
"2 10 Contracts for Difference and Spread Betting               47
2.1  E xchange Traded Funds (ETFs)                              48
2.12 Futures on Individual Stocks                               49
2,1? Conclusions                                                50
PART 2 - ARBITRAGE
3. Arbitrage and the Valuation of Stock Index Futures              53
3.1 Assumptions                                                 53
3.2 Derivation of the No-Arbitrage Condition                    53
3.3 Restatements of the No-Arbitrage Condition                  58
3.4 The Arbitrage Process                                       61
3.5 Early Unwinding of an Arbitrage Position                    65
3.6 Delayed Unwinding (or Rollover) of an Arbitrage Position    71
3 .7 Synthetic Futures Contracts                                79
3.8 Other Forms of Arbitrage                                    79
3.9 Conclusions                                                 82
4. Arbitrage in Practice                                           85
4.1 Over or Underpriced Futures?                                85
4.2 Dynamics of the Arbitrage Response                          95
4.3 Mispricings and Spot Volatility                             105
4,4 Some Practicalities of Arbitrage Transactions               106
4.5 Conclusions                                                 112
5. Arbitrage and Relaxing the Assumptions                         113
5.1 No Marking to the Market                                   113
5.2 Singie Riskless Interest Rate                               113
5.3 Constant Riskless Interest Rate                            1 14
5A4 No T     axes                                               117
5.5 Certain Dividends                                           119
5.6 No Transactions Costs                                       119
5.7 No Intial Margin  .126
5.8 No Continuous Compounding                                   1 27
5.9 Index Weights                                              127
5 10 Arithmetic Index                                           127
"5.11 Price index                                               129
5,12 Current Prices                                             131
5.13 Short Selling                                             131
5.14 Proceeds of Short Sales                                    134
5.15 Simultaneous Trading                                       135
5.16 No Delivery Price Risk                                     136
5. 7 No Changes in the Definition of the Index                 13'
5 18 Perfect Asset Divisibility                                138
5,19 No Price Effect Except in Aggregate                       139
5,20 Shares are Paid for Immediately                           139
5.21 Capital Gains or Losses are Paid at Liquidation            140
5 22 No Risk of D efault                                        141
5 23 Common Currency for Shares and luitiplier                  1 41
5.24 Zero Value of Voting and Other Rights                     141
5.25 Immoral Investments                                       142
5.26 Costless Storage                                          142
5.27 Independence of the Index                                  142
5.28 Conclusions                                                143
Appendix A, No- Arbitrage Conditions with Continuous Compounding  143
PART 3 - PRICES
6. Basis, Spreads and the Risk Premium                            149
6.1 The Basis                                                  149
6.2 Basis Speculation                                          150
6.3 Basis and Maturity                                         152
6.4 Basis Risk                                                 154
6.5 Cointegration of Spot and Futures Prices                   155
6.6 information Adjustment Speed and Price Discovery           158
6.7 The Basis and the October 1987 Crash                       179
6.8 Leads and Lags in Price Volatility                         181
6.9 Spread Trading                                             183
6 O0 Intracommodity Spreads                                    184
6 11 Intercommodity Spreads                                    187
6.12 Spread Ratios                                             188
6. 13 Synthetic ndex Futures                                   190
6.14 Einpirical Studies of Spreads                             191
6.15 The Risk Premium                                          192
6.16 The Expected Spot Price                                   192
6.17 Backwardation, Normal Backwardation and Contango          193
6.18 The Risk Premium for Index Futures                        194
6.19 Conclusions                                               198
7. Maturity, Price Volatility and Volume                          199
7,1 Measurement of the Variables                               199
1.2 Price Volatility and Maturity                              202
7.3 Price Volatility and Volume                                210
7.4 'Causality' Between Price Volatility and Volume            215
7.5 Volume and Maturity                                        217
8. Market Efficiency                                              221
8.1 Weak Efficiency                                            22)1
8.2 Semi-Strong Efficiency                                     232
8.3 Strong Eficiency                                           236
8.4 Time-related Anomalies                                     236
8.5 Conclusions                                                249
PART 4 - USES
9. Hedging                                                        253
9.1 The Purpose of Hedging                                     253
9.2 Risk Minimisation and the Portfolio Approach               258
9.3 Alternative fedge Ratios                                   261
9 4 Choice of Futures Contract and Cross Hedging               263
9.5 Measuring fHedge Effectiveness                             266
9.6 Restatement of the Hedge Ratio Using Betas                 268
9.7 Hedging Many Different Risky Positions                     270
9.3 Composite Hedges                                           2" 7
9) Generalized Hedging                                         272
910 Tail Risk and Tailing the Hedge                            273
9.11 Dividend Risk                                             276
,12 Hedging and the Value of the Firm                          276
9.13 Estimaion of the Risk-minimising Hedge Ratio              279
9.14 Empirical Studies                                         283
9.15 Conclusions                                               300
10. The Uses of Stock Index Futures by Fund Managers              301
10.1 Two Basic Properties of Index Futures                     301
10.2 Uses of Index Futures by Fund Managers                    307J
10.3 Usage of Index Futures                                    330
10.4 Other Users of Index Futures                              333
10.5 Conclusions                                               334
PART 5 - OTHERS
II The Design and Regulation of Futures Contracts                 339
! 1 I Choice of Initial and Maintenance Margins                339
11.2 Liquidity Requirements and Variation Margin  .             53
11.3 Price Limits                                              356
11.4 Trading Hours                                             362
11.5 Taxation of Futures Trading                               363
11.6 Minimum Price Movement and Price Clustering               364
11.7 Contract Multiplier                                       366
S1.8 Contract Delivery Months                                  368
1 19 Ma anipuation of the Final Settlement Price               369
1 1L10 Choice of Index                                         370
1 I iI Dual Listint                                            372
11. 2 Trading Mechanisms                                       375
11.13 Dual Capacity                                            378
1 114 Deterninants of Success                                  382
11 15 C olusionusn                                             384
12, Further Topics in Index Futures                               385
12.1 index Futures and Share Price Volatility                  385
12.2 Portfolio Insurance and Share Price Volatiliy             415
2.3 Other Effects of the Existence of Index Futures            417
12.4 Linkages between Equity and Futures Markets              420
12.5 Conclusions                                              425



Library of Congress subject headings for this publication: Stock index futures