Share
Explore BrainMass

Index and Interest Rate Futures

Can you please provide me with brief response to my questions noted below

Stock Index Futures
How are stock index futures used?
How are stock index futures priced?
What is basis convergence?
How do you hedge with stock index futures?

Fundamentals of Interest Rate Futures
What are T-bills and Eurodollars, and what are their futures?
How do you hedge or speculate with T-bill and T-bonds futures?
What is the delivery process?
How do you price interest rate futures?

Thank you

Solution Preview

Hello!
Here are your answers.

How are stock index futures used?
Stock index futures are mostly used for either hedging or speculating. If you are anticipating that the stock market as a whole will go up, you could buy stock index futures. As the index goes up, so will the futures contracts on it, so the buying position will appreciate. Hedgers can use them to hedge a portfolio that is correlated to the market. The higher the beta of the portfolio, the more futures contracts that will be needed in order to hedge it against moves in the index.

How are stock index futures priced?
I have already given you the formula for pricing these futures in my answer to question 69663. It depends on the current value of the stock index, its dividend yield, the riskfree rate and the time to maturity.

What is basis convergence?
Recall that the ...

Solution Summary

How are stock index futures priced?

$2.19