Index futures are futures contracts on a stock or financial index. For each index, there may be a different multiple for determining the price of the futures contract. However, if this hedging strategy is used perfectly, the manager's portfolio will not participate in any gains on the index; instead, the portfolio will lock in gains equivalent to the risk-free rate of interest.
Alternatively, stock portfolio managers can use index futures to increase their exposure to movements in a particular index, essentially leveraging their portfolios. The underlying commodity associated with an index future is a particular stock index, which cannot be traded directly. This causes futures to be the main way stock indexes can be traded, functioning and trading in the same way as other investments on the futures market. Since an index is comprised of stock from multiple companies, settlement cannot be handled through the transition of ownership of a particular stock certificate.
Instead, most index futures are settled in the currency associated with the investment. Index futures are also available in foreign markets. An index futures contract states that the holder agrees to purchase an index at a particular price on a specified date in the future. If on that future date the price of the index is higher than the agreed-upon price in the contract, the holder has made a profit, and the seller suffers a loss.
If the opposite is true, the holder suffers a loss, and the seller makes a profit. Futures contracts are legally binding documents specifying the detailed agreement between the buyer and seller. It differs from an option in that a futures contract is considered an obligation, while an option is considered a right that may or may not be exercised. Dictionary Term Of The Day.
The ability of a company to meet its long-term financial obligations. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. What are 'Index Futures' Index futures are futures contracts on a stock or financial index.
Index Futures Contracts An index futures contract states that the holder agrees to purchase an index at a particular price on a specified date in the future. Get Free Newsletters Newsletters.More...