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Futures books
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STOCK INDICESThe indices used in the futures markets are the subject of this page. It is the most widespread index which is used in the futures markets. It is calculated by using 500 stocks . 93 % of these stocks are traded in New York Stock Exchange (NYSE). The others are traded in American Stock Exchange AMEX and the over-the-counter exchanges. The S&P 500 traded in Chicago Mercantile Exchange (CME) is a market capitalization weighted index. The S&P 500 index contains a lot of stable stocks but its volatility is high because of the arbitrage and the program trading operations. It is possible to mimic it by an arbitrage portfolio which contains 200 stocks whose the market capitalization are high. The NYSE Composite includes 2,083 common stocks, including 1,698 U.S.(71% of the Index) and 385 non-U.S. (29%) stocks. The index is traded in the NYSE and it is a market capitalization weighted index. The NYSE index contains the majority of the stocks which are in The S&P 500 index so that the correlation coefficient between the NYSE and the S&P 500 indices are approximately equal to 1 The DJIA is a price-weighted index of 30 of the largest, most liquid U.S. stocks. They are traded in Chicago Board of Trade . It was not permitted to use the Dow Jones Index in the futures markets , thus CBT formed Major market index (MMI).It contains most of the stocks which are in Dow Jones Index. Because of this it is very similar to Dow Jones Index . In order to prevent the artificial changes due to the change of the stocks which are in the index , a coefficient is used in the calculation of the MMI. The greatest disadvantage of the MMI is to accept that the firms whose market capitalization values are low and high are equivalent. It is an index which the arbitrage is easiest because it is formed by 20 stocks. Its standard deviation is bigger than the standard deviations of the NYSE index, the S&P 500 index and the Value Line index. It is formed by 1700 stocks. It is traded in Kansas City Board of Trade (KCBT). The Value Line Index (VL) is an equally weighted index calculated by the geometric average. Its standard deviation is lower than the standard deviation of the NYSE ,the S&P 500 and the Major Market indices . Because of the difference in the calculation method the correlation between the Value Line index and the 3 other indices is poor. 10% of the stocks contained in the Value Line index is traded in the over the counter markets . The duration between the arrival of the economic news and the realization of the operations is long so that the index doesn’t reflect the real value and the arbitrageurs are not interested in it. The investors who have the stocks traded in over the counter markets prefer to use Value Line index which is similar to their portfolios for hedging. It is calculated by using the stocks which are the higher market capitalization value and the operation volume in French exchange. It’s traded in Marché à Terme International de Paris (MATIF). It is calculated by using 100 stocks which are the higher market capitalization value. It’s traded in London International Financial Futures Exchange (LIFFE) .
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