8.1 Exchange-Traded Equity Index and Universal Stock Futures

Futures contracts represent an agreement between two parties to undertake a transaction at some agreed future date at a price agreed now. These contracts are exchange-based instruments and, as such, contracts are tightly specified so that market participants know exactly what they are agreeing to buy or sell. The contracts have standard delivery dates and the determination of a contract s value at a point in time is normally defined as an exchange specified multiplier times the current market quote for the futures contract. Table 8.1 illustrates a typical contract specification from LIFFE. Note that the multiplier that determines the price of a contract is defined as 10. The delivery months are clearly laid out as the cycle March, June, September and December. The delivery and last trading day (LTD) are specified to be the first business day after the LTD and the third Friday in the delivery month, respectively. Of course, the contract makes provision for the eventuality that the last trading and delivery days fall on public holidays. These contracts also define the smallest amount by which quotes can move, which is called a tick, and attach a value to those minimum price movements. In the case of the LIFFE FTSE 100 quote the tick size is 0.5 of an index point, in other words 0.5( 10.00)= 5.00.