17.7 Stock index futures

Financial derivatives

Stock index futures have become the most popular financial derivative instruments and widely traded all over the world. In India also there are the most popular derivative instrument. Index futures are futures contract on the index itself. When trading takes place in stock index futures, it means that the participants are taking a view on the way the index will move. By trading in index-based futures and options, you buy or sell the 'entire stock market' as a single entity. Here the underlying asset is index value. One can buy a 1, 2 or 3- month index future. We know that an index is a set of numbers that represent a change over a period of time. (we have already discussed about index in our first module ).

Why are index futures more popular than stock futures? Globally, it has been observed that index futures are more popular as compared to stock futures. This is because the index future is a relatively low risk product compared to a stock future. It is easier to manipulate prices for individual stocks but very difficult to manipulate the whole index. Besides, the index is less volatile as compared to individual stocks and can be better predicted than individual stock.