Single-stock futures
Encyclopedia
Single-stock futures
In finance, a single-stock futures is a type of futures contracts between two parties to exchange a specified number of stocks in company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to take delivery of the underlying stock in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to deliver the stock in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the stock price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).
(SSF's) are usually traded in increments 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.
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.
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:
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).
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.
In finance, a single-stock futures is a type of futures contracts between two parties to exchange a specified number of stocks in company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to take delivery of the underlying stock in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to deliver the stock in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the stock price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).
(SSF's) are usually traded in increments 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.
SSF's in the U.S.
In the United States, they were disallowed from any exchange listing in the 1980s because the Commodity Futures Trading CommissionCommodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
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
Commodity Futures Modernization Act of 2000
The Commodity Futures Modernization Act of 2000 is United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. It was signed into law on December 21, 2000 by President Bill Clinton...
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
OneChicago, LLC
OneChicago is an all-electronic exchange owned jointly by IB Exchange Group , Chicago Board Options Exchange , and CME Group. It is a privately held company that is regulated by both the Securities and Exchange Commission and the Commodity Futures Trading Commission...
, a joint venture of three previously-existing Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
-based exchanges, the Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
, Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
and the Chicago Board of Trade
Chicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
. In 2006, the brokerage firm Interactive Brokers
Interactive Brokers
Interactive Brokers Group, Inc. is an online discount brokerage firm in the United States. The company traces its origin to 1977 when Thomas Peterffy bought a seat on the American Stock Exchange as an individual market maker, and formed T.P. & Co. the following year...
made an equity investment in OneChicago
OneChicago, LLC
OneChicago is an all-electronic exchange owned jointly by IB Exchange Group , Chicago Board Options Exchange , and CME Group. It is a privately held company that is regulated by both the Securities and Exchange Commission and the Commodity Futures Trading Commission...
and is now a part-owner of the exchange.
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: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
Risk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
, 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:
where S is the stock price, PV(Div) is the Present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
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).
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.
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.