Stock Index Futures

STOCK INDEX/FX FUTURES CONTRACT: SUMMARY

†Barry A. Goss and Joost M.E. Pennings*

PURPOSE: Many investors with positions in equities face price risks for both stocks and exchange rates, and frequently their decisions for these two assets are interdependent.This proposal takes this interdependence into account, for investors with risk management and/or speculation/arbitrage objectives. This product brings together two securities, namely a stock index and FX, and allows an investor to take positions in two separate, but related asset markets, simultaneously, and in one transaction.

ADVANTAGES:

Advantages of the proposed product include:

• It enables investors to manage risk, or to take additional risk in two markets in one transaction, thereby economizing on time and transaction costs.
• It enables the securities exchange to attract business from other exchanges without duplicating the contracts of other exchanges.
• The product concept can be extended to other pairs of related asset markets.

POTENTIAL USERS:

This product is designed specifically for investors who face stock price risks and FX risks (such as domestic pension funds holding foreign stocks), and who have a view of the future relationship between the prices of the two assets. It is also designed for investors who wish to take additional risks in stocks and FX, or who wish to arbitrage between these two assets.

PROPOSAL DOCUMENT:

The Proposal discusses the theoretical foundations of the contract, analyses the impact of changes in fundamentals on the contract price, and contains worked examples of responses to these changes by different categories of investors. The Proposal is illustrated with stock index and FX data from U.S.A. and Japan, and contains suggested contract specifications.

*B.A. Goss is Founding Director, Futures Markets Research Associates Pty Ltd, Melbourne, Australia,
email Barry.Goss@fmra.com.au fax 61 3 9824 6467 (previously Reader in Economics and Director Derivatives Research Unit, Monash University, Australia).

J.M.E. Pennings is Professor of Finance and Marketing, University of Maastricht, and Chairman, FS-Innovators, Maastricht, The Netherlands, email pennings@fs-innovators.com fax 31 43 3500850.

†This product is covered by the trade mark SPERA® in U.S.A.