Investments, tenth edition

23.3 

   The Contracts 

 In contrast to most futures contracts, which call for delivery of a specified commodity, 

stock-index contracts are settled by a cash amount equal to the value of the index on the 

contract maturity date times a multiplier that scales the size of the contract. The total profit 

to the long position is  S  

 T 

   2   F  

0

 , where  S  

 T 

  is the value of the stock index on the maturity 

date. Cash settlement avoids the costs that would be incurred if the short trader had to pur-

chase the stocks in the index and deliver them to the long position, and if the long position 

then had to sell the stocks for cash. Instead, the long trader receives  S  

 T 

   2   F  

0

  dollars, and 

the short trader  F  

0

   2   S  

 T 

  dollars. These profits duplicate those that would arise with actual 

delivery. 

 There are several stock-index futures contracts currently traded.  Table 23.1  lists some 

of the major ones, showing under contract size the multiplier used to calculate contract 

settlements. An S&P 500 contract, for example, with a futures price of 1,400 and a final 

    23.2 

Stock-Index Futures 

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  C H A P T E R  

2 3

  Futures, Swaps, and Risk Management 

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index value of 1,405 would result in a profit for the long side of $250  3  (1,405  2  1,400)  5  

$1,250. The S&P contract by far dominates the market in U.S. stock index futures.  

2

  

   

 The broad-based U.S. stock market indexes are all highly correlated.  Table  23.2  is a 

correlation matrix for four well-known indexes: the S&P 500, the Dow Jones Industrial 

Average, the Russell 2000 index of small capitalization stocks, and the NASDAQ 100. 

The highest correlation, .979, is between the two large-cap indexes, the S&P 500 and the 

DJIA. The NASDAQ 100, which is dominated by technology firms, and the Russell 2000 

index of small-cap firms have smaller correlations with the large-cap indexes and with 

each other, but even these are above .85.   

2

 We should point out that while these multipliers may make the resulting positions too large for small investors, 

there are many effectively equivalent futures with smaller multipliers (typically one-fifth the value of the standard 

contract) called  E-Minis.