Single-stock futures: Difference between revisions
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Single stock futures values are priced by the market in accordance with the standard theoretical pricing model for forward and futures contracts, which is: |
Single stock futures values are priced by the market in accordance with the standard theoretical pricing model for forward and futures contracts, which is: |
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:<math>F = [S - PV(Div)] \cdot (1 + r)^{(T-t)} \ </math> |
:<math>F = [S - PV(Div)] \cdot (1 + r)^{(T-t)} \ </math><ref>http://www.onechicago.com/?p=677</ref> |
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where F is the current (time t) cost of establishing a futures contract, S is the current price (spot price) of the underlying stock, r is the annualized [[risk-free interest rate]], PV(Div) is the present value of an expected dividend, t is the present time, and T is the time when the contract expires. |
where F is the current (time t) cost of establishing a futures contract, S is the current price (spot price) of the underlying stock, r is the annualized [[risk-free interest rate]], PV(Div) is the present value of an expected dividend, t is the present time, and T is the time when the contract expires. |
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When the risk-free rate is expressed as a continuous return, the contract price is: |
When the risk-free rate is expressed as a continuous return, the contract price is: |
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:<math>F = [S - PV(Div)] \cdot e^{r \cdot (T-t)} \ </math> |
:<math>F = [S - PV(Div)] \cdot e^{r \cdot (T-t)} \ </math><ref>http://www.onechicago.com/?p=677</ref> |
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where S is the stock price, PV(Div) is the [[Present value]] of any dividends generated by the underlying stock between T and t, r is the risk free rate expressed as a continuous return, and e is the base of the natural log. Note the value of r will be slightly different in the two equations. The relationship between continuous returns and annualized returns is r<sub>c</sub> = ln(1 + r). {{Fact|date=July 2009}} |
where S is the stock price, PV(Div) is the [[Present value]] of any dividends generated by the underlying stock between T and t, r is the risk free rate expressed as a continuous return, and e is the base of the natural log. Note the value of r will be slightly different in the two equations. The relationship between continuous returns and annualized returns is r<sub>c</sub> = ln(1 + r). {{Fact|date=July 2009}} |
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Revision as of 20:16, 25 February 2011
Single-stock futures (SSF's) are futures contracts with the underlying asset being one particular stock, usually in batches of 100. When purchased, no transmission of share rights or dividends occurs. Being futures contracts they are traded on margin, thus offering leverage, and they are not subject to the short selling limitations that stocks are. They are traded in various financial markets, including those of the United States, United Kingdom, Spain, India and others. South Africa currently hosts the largest single-stock futures market in the world, trading on average 700,000 contracts daily.[1]
In the United States, they were disallowed from any exchange listing in the 1980s because the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission were unable to decide which would have the regulatory authority over these products.
After the Commodity Futures Modernization Act of 2000 became law, the two agencies eventually agreed on a jurisdiction-sharing plan and SSF's began trading on November 8, 2002.
Two new exchanges initially offered security futures products, including single-stock futures, although one of these exchanges has since closed. The remaining market is known as OneChicago, a joint venture of three previously-existing Chicago-based exchanges, the Chicago Board Options Exchange, Chicago Mercantile Exchange and the Chicago Board of Trade. In 2006, the brokerage firm Interactive Brokers made an equity investment in onechicago and is now a part-owner of the exchange.
Trading Volume
SSFs have yet to gain significant popularity among securities and derivatives traders in the United States. Daily total contract volume[2]averaged approximately 26,000 contracts/day in December 2005. Although 2005 total annual volume did increase 188% over 2004, volumes are still small in comparison to more established derivative contracts. For example, U.S. equity & ETF options trade approximately 6,000,000 contracts/day.
Pricing
Single stock futures values are priced by the market in accordance with the standard theoretical pricing model for forward and futures contracts, which is:
![{\displaystyle F=[S-PV(Div)]\cdot (1+r)^{(T-t)}\ }](https://wikimedia.org/api/rest_v1/media/math/render/svg/f4bd2166bef62af5c575cf0859c17d5fc0a0498a)
where F is the current (time t) cost of establishing a futures contract, S is the current price (spot price) of the underlying stock, r is the annualized risk-free interest rate, PV(Div) is the present value of an expected dividend, t is the present time, and T is the time when the contract expires.
When the risk-free rate is expressed as a continuous return, the contract price is:
![{\displaystyle F=[S-PV(Div)]\cdot e^{r\cdot (T-t)}\ }](https://wikimedia.org/api/rest_v1/media/math/render/svg/ff79272c7704261633f94e946163837c0772689a)
where S is the stock price, PV(Div) is the Present value of any dividends generated by the underlying stock between T and t, r is the risk free rate expressed as a continuous return, and e is the base of the natural log. Note the value of r will be slightly different in the two equations. The relationship between continuous returns and annualized returns is rc = ln(1 + r). [citation needed]
The value of a futures contract is zero at the moment it is established, but changes thereafter until time T, at which point its value equals ST - Ft, i.e., the current cost of the stock minus the originally established cost of the futures contract.
References
External links
- OneChicago - The Single Stock Futures Exchange
- Commodity Futures Trading Commission - the main federal agency that regulates futures and the exchanges in the United States.
