Stock index futures
Family I · Instruments
Not to be confused with futures contract, index, limit stock order.
Stock index futures are standardised agreements to buy or sell the value of a stock index at a set future date, with settlement typically in cash rather than physical delivery of shares. They are used to gain or hedge exposure to a broad market segment without trading the underlying constituents. Their price moves in response to the index and to expectations about dividends, interest rates and time to expiry.
Contract mechanics
Each contract specifies an underlying index, a multiplier that converts index points into currency, a tick size, and a settlement date. Positions are marked to market daily, and margin is posted with the clearing house. Because delivery would be impractical, contracts are cash-settled against the index value at expiry.
For example, a contract on an index trading at 4,000 points with a multiplier of 10 has a notional value of 40,000 in the contract currency. A one-point move changes the position value by 10.
Worked example
Uses and risks
Portfolio managers use index futures to adjust market exposure quickly, to hedge a basket of shares, or to take a directional view. The main risks are leverage, which magnifies both gains and losses, and basis risk when the futures price diverges from the underlying index. Contract sizes, tick values and margin requirements vary by exchange and jurisdiction.
Often confused with
- futures contract
- A stock index future is a type of futures contract, whereas the general term covers any underlying such as commodities, currencies or bonds; the visible sign is the underlying asset named in the contract specification.
- index
- An index is a statistical measure of a group of securities, while a stock index future is a tradable derivative whose price is based on that measure; the visible sign is the presence of an expiry date and a multiplier.
- limit stock order
- A limit stock order is an instruction to buy or sell actual shares at a specified price or better, whereas a stock index future is a derivative contract for cash settlement; the visible sign is whether the order results in ownership of shares or a futures position.