How the price of stock futures is calculated

If securities are publicly traded, there are derivatives or other secondary by-products. Put options, real estate investment trusts, rainbows, etc.; all of these depend on the underlying stock, real estate, or even multiple stocks or other things. So it applies to futures, in which you bet on whether the price of a commodity will rise or fall before a certain date. (Although no one in the market calls it “betting”. The preferred artistic term is “transfer risk”.) The commodity in question can be perishable (such as cattle, wheat) or non-perishable (silver, Platinum). It can even be intangible.

Take the Dow Jones Industrial Average or S&P 500 as an example. In essence, a stock market index is just a number, representing a collection of stock prices manipulated arithmetic. An index is a quantity, but not really “belonging” to anything you can taste or touch. However, we can add another level of abstraction and create futures contracts for stock indexes. The result is that speculators establish positions on the overall market.In other words, buying and/or selling A number. Many great cultural and perceptual meanings, but in the end it is still a number.

This is an example. There are futures contracts on the Dow Jones Indices, and they settle at the end of the quarter. On October 15, 2014, the Dow closed at 16,141.74. (Even if the trading prices of several of its components exceed $100, for some reason, the quotation of the index is still kept to two decimal places.) Therefore, the next four upcoming futures closing dates are December 2014, March 2015, June 2015 and September 2015.

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At the time of writing, we are in a chronological partial bear market. The Dow Jones Index is at its lowest level since April and is down 7% from its all-time high a month ago. The Dow Futures reflects the general pessimism, and the contract price at the close of December 2014 is currently 16,049. The haze continued into 2015: the remaining subsequent futures trading prices were 15,936; 15,850; and 15,760 respectively.

15,760 is obviously a huge loss. In fact, between now and the end of next summer, will the market lose another 2.4% of its value? The collective wisdom says yes.Or to be more precise, the collective wisdom has determined that 15,760 points are speculators collective Have already met with opinions. This is much like the point difference of a football game. Suppose the Buccaneers hope to beat the Jets by 3 points next week. This number does not have to accurately represent the relative strength of the team. Conversely, when the pirates are favored by 3, it means that as many people as possible in the market invest in the propositions of “they will” and “they won’t.” Excessive pessimism or optimism can distort prices.

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More fundamentally, why does the upcoming futures price show a downward trend rather than an upward trend? Or even just remain neutral? The usual suspects are the culprits-basic levels of economic uncertainty, weak growth, and political turmoil. Putting aside other negative factors, no matter how accidental they are to the stock market (such as ISIS, Ebola virus), we are here.

On the surface, stock index futures should track actual index trends. By purchasing an index fund that tracks the Dow Jones Index or the S&P 500 Index, you can expect to pay a specific price that is proportional to the level of the index itself. The two fluctuate synchronously, or are close to fluctuations. But one big difference between stock index futures and this type of index fund is that the former does not consider dividends. Since the index fund actually holds positions in the various stocks that make up the index, any dividends that the company managers who are eligible for these stocks decide to pay to shareholders. Abstract tools like stock index futures do not hold positions in the stocks that make up the index and therefore do not have any dividend potential.

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Bottom line

In terms of its nature, stock index futures operate differently from futures contracts for more obvious securities such as cotton, soybeans or Texas sweet oil. When the index futures contract expires at the end of the quarter, the contract holder is delivering… well, there is actually nothing. It’s just funds to settle the contract. If the Dow Jones Index is at 16,000 points at the end of September next year, then holders of the 2015 September futures contract at 15,760 points will get a moderate profit. In fact, stock index futures are purchased by portfolio managers who only want to hedge against potential losses. However, whether it is held by conservative fund managers or reckless speculators, looking for an obscure new tool for research, stock index futures represent a kind of transfer in a market that sometimes fluctuates sharply. Effective methods of risk.


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