chapter9 - CHAPTER 9 Security Futures Products Introduction...

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Chapter 9 1 CHAPTER 9 Security Futures Products Introduction Chapter 9 and 10 explore stock index futures. This chapter is organized into the following sections: 1. Indexes 2. Stock Index Futures Contracts 3. Stock Index Futures Prices 4. Index Arbitrage and Program Trading 5. Speculating with Stock Index Futures 6. Risk Management with Stock Index futures
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Chapter 9 2 Indexes If you have insight into the future direction of the stock market, specifically one index or another, you may want to trade stock index futures. Stock index futures allow you to make a bet on which direction you think a stock market index is headed. Stock index futures also allow you to hedge various financial positions. Stock index futures trade on a number of different indexes.
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Chapter 9 3 Indexes The various indexes use differing computational methods. To understand the trading and pricing of index futures, one must first understand a bit about how the underlying indexes are computed. INDEX ACRONYM DESCRIPTION Dow Jones Industrial Averages DJIA 30 large U.S. companies. Price- weighted index. Dividends are not included Nikkei 225 Nikkei 225 Largest Japanese firms. Price- weighted index. Dividends are not included S&P 500 S&P 500 Market Capitalization (value) Weighted Index. Dividends are not includes FT-SE 100 FT-SE 100 British 100 index. Market Capitalization (value) Weighted Index. Dividends are not includes Deutscher Aktien 30 DAX 30 German index .Total Return index that includes capital gains, dividends, spin offs, mergers etc Compagnie des Agents de Change 40 CAC 40 French index Total Return index that includes capital gains, dividends, spin offs, mergers etc. Dow Jones Stoxx Total Return index that includes capital gains, dividends, spin offs, mergers etc
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Chapter 9 4 Priced-Weighted Indexes In a price-weighted index, stocks with a higher price receive a larger weighting in the computations. Price-weighted indexes do not consider dividends paid by the stocks. The companies contained in these indexes change infrequently. Changes only occur as a result of special events like liquidations and mergers. In this section, the DJIA is used as a representative price- weighted index. The DJIA is comprised of 30 stocks. Table 9.1 shows the lists of stocks.
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Chapter 9 5 DJIA Index Table 9 .1 Stocks in the D ow Jones Industrial Average Alcoa Altria Group American Express American Int. Group Boeing Caterpillar Citigroup Coca B Cola DuPont Exxon-Mobil General Electric General Motors Hewlett-Packard Home Depot Honeywell Intel IBM J P Morgan-Chase Johnson & Johnson McDonald = s Merck Microsoft Minnesota, Mining, Mfg. Pfizer Inc. Procter & Gamble SBC Communications United Technologies Verizon Communications WalMart Walt Disney Company Source: Dow Jones web site, April 8, 2004
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Chapter 9 6 Priced-Weighted Indexes The DJIA is computed by adding the share prices of the 30 stocks comprising the index and dividing by the DJIA divisor. The divisor is used to adjust for stock splits, mergers, stock dividends, and changes in the stocks
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chapter9 - CHAPTER 9 Security Futures Products Introduction...

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