The turnover for the global market in exchange-traded equity index futures is notionally valued, for , by the Bank for International Settlements at USD trillion. Stock index futures are used for hedging , trading , and investments. Index futures are also used as leading indicators to determine market sentiment. Trading using stock index futures could involve, for instance, volatility trading The greater the volatility, the greater the likelihood of profit taking — usually taking relatively small but regular profits.
Investing via the use of stock index futures could involve exposure to a market or sector without having to actually purchase shares directly. There are cases of equity hedging with index futures. One case is where a portfolio 'exactly' reflects the index this is unlikely so that the portfolio is perfectly hedged via the index future.
Another case is where a portfolio does not entirely reflect the index this is more likely to be the case. Here, the degree of correlation between the underlying asset and the hedge is not high. So, your portfolio is unlikely to be 'fully hedged'. Equity index futures and index options tend to be in liquid markets for close to delivery contracts. OTC products are usually for longer maturities, and are usually a form of options product.
For example, the right but not the obligation to cash delivery based on the difference between the designated strike price, and the value of the designated index at the expiration date. These are traded in the wholesale market, but are often used as the basis of guaranteed equity products, which offer retail buyers a participation if the equity index rises over time, but which provides guaranteed return of capital if the index falls.
Sometimes these products can take the form of exotic options for example Asian options or Quanto options. Forward prices of equity indices are calculated by computing the cost of carry of holding a long position in the constituent parts of the index.
This will typically be the risk-free interest rate , since the cost of investing in the equity market is the loss of interest minus the estimated dividend yield on the index, since an equity investor receives the sum of the dividends on the component stocks. Since these dividends are paid at different times, and are difficult to predict, estimation of the forward price can be difficult, particularly if there are not many stocks in the chosen index.
Indices for OTC products are broadly similar, but offer more flexibility. From Wikipedia, the free encyclopedia. This article has multiple issues. Please help improve it or discuss these issues on the talk page. Learn how and when to remove these template messages. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. April Learn how and when to remove this template message.
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