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1 January 1980 Financial Analysts Journal Volume 36, Issue 1

Market Index Futures Contracts

  1. Victor Niederhoffer
  2. Richard Zeckhauser

Investors may soon be able to trade futures contracts in stock market averages. The Chicago Mercantile Exchange plans a contract based on the Standard & Poor’s 500 stock index. The Chicago Board of Trade has proposed several market index futures contracts, including one based on an index of its own construction. The Kansas City Board of Trade plans to trade a contract based on the Value Line Composite Index.

The Kansas City contract (VLF) based on the Value Line Composite Index (VLCI) is fairly typical. Each VLF contract would constitute a promise to buy or sell 500 units of the VLCI, measured in dollars. The underlying value of one VLF contract would be roughly $50,000, since the VLCI currently hovers around 100. Initial margin requirements would be $2,000 for hedgers and $4,000 for speculators. Six contracts will trade at any one time, with delivery in March, June, September and December.

Regular commissions on a round-trip transaction in one VLF contract are anticipated to be $60—only 13 per cent of the cost of buying and selling a reasonably diversified stock portfolio of comparable value. Since the average monthly change in the VLCI is about 5.2 points, the corresponding change in the value of a VLF contract would be $2,600 (500 × 5.2)—about 65 per cent of the initial investment of an investor speculating on margin.

Market index futures contracts will provide the margin speculator with a vehicle for participating in general market movements. He will enjoy both a high degree of leverage and low commission costs. In addition, he will know that the contract—being based on the prices of a large number of securities—will be difficult to manipulate and impossible to corner. But market index futures contracts will also be invaluable to investors (including institutions) who desire to protect themselves against such market movements; the contracts will allow them to take either a long or short position in the shares of a specific company without incurring the commensurate market-related risks.

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