39 lines
2.9 KiB
Plaintext
39 lines
2.9 KiB
Plaintext
462
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A Complete Guide to the Futures mArket
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dividends. Thus, the interest rate cost of holding a stock position is offset (partially, or more than
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totally) by dividend income. The presence of dividends is easily incorporated into the framework of
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calculating a theoretical spread level. The spread would be in equilibrium if, based on current prices,
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interest rates, and dividends, there would be no difference between holding the actual equities in
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the index for the interim between the two spread months versus buying the forward index futures
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contract. Holding equities would incur an interest rate cost that does not exist in holding futures, but
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would also accrue the dividend yield the holder of futures does not receive. The theoretical spread
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level (P
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2 − P1) at the expiration of P 1 at which these two alternative means of holding a long equity
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position—equity and stock index futures—would imply an equivalent outcome can be expressed
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symbolically as follows:
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PP P t id21 1 360−=
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−()
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where P1 = price of nearby (expiring) futures contract
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P2 = price of forward futures contract
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t = number of days between expiration of nearby contract and expiration of forward contract
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i = short-term interest rate level at time of P1 expiration
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d = annualized dividend yield (%)
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As is evident from this equation, if short-term interest rates exceed dividend yields, forward
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futures will trade at a premium to nearby contracts. Conversely, if the dividend yield exceeds short-
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term interest rates, forward futures will trade at a discount.
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Since the dividend yield is not subject to sharp changes in the short run, for any given index
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(price) level, intramarket stock index spreads would primarily reflect expected future short-term
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rates (similar to gold spreads). If short-term interest rates exhibit low volatility, as characterized by
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the near-zero interest rate environment that prevailed in the years following the 2008 financial crisis,
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stock index spreads will tend to trade in relatively narrow range—a consequence of both major
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drivers of stock index spreads (interest rates and dividend yield) being stable.
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■ Intermarket Stock Index Spreads
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As is the case with intercommodity and intermarket spreads trading at disparate price levels, stock
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index spreads should be traded as ratios rather than differences—an approach that will make the
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spread position indifferent to equal percentage price changes in both markets (indexes). As a reminder,
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to trade a ratio, the trader should implement each leg of the spread in approximately equal contract
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value positions, which, as was shown in Chapter 31, can be achieved by using a contract ratio that is
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inversely proportional to the contract value ratio.
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For example, if the E-mini Nasdaq 100 futures contract, which has a contract value of 20 times the
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index, is trading at 4,300 (a contract value of $86,000), and the Russell 2000 Mini futures contract, |