ITEM PF12 - ANNEX 1
PENSION FUND COMMITTEE – 29 AUGUST 2003DERIVATIVESFUTURES, OPTIONS AND SWAPS
STOCK INDEX FUTURES – TECHNICAL DETAILS
Size of contract – with the FTSE 100 index at 4127 one contract gives the investor £41,000 exposure to the market. For each one point movement in the index the investor gains or looses £10.
Period - Three months expiring on the third Friday of March, June, September and December. Dealing effectively stops just before the expiry date. Expiring contracts may be rolled on to the next quarterly contract.
Initial margin - £2,700 per contract, but as the value of the contract changes each working day with the movement of the index, the difference in the value from the previous working day is adjusted in cash (i.e. marked to market).
The closing settlement price is fixed at around 10.30 am on the expiring date when the final daily cash adjustment is made and the initial margin is returned to the investor.
Size of theoretical loss - Net long future position (i.e. buying the FTSE 100 index). The loss is limited to the downside of the index. In theory if the index fell to zero over the three month period the whole value of the contract would be lost, but in practice a fall of 15-20% over that period could be considered as extreme. Between end June and end September 2002 the market fell sharply losing 20%.
However to the extend that a fund is not dealing ‘naked’, but only buying FTSE futures to cover the reallocation of existing assets or the investment of funds to be received during that period, the loss on the future contract would be offset by the gain on the lower price of the shares to be bought in the cash market. Further, the net long position can be closed by selling the future to bring the net position to nil.
Net short future position (i.e. selling the FTSE index). In theory the loss could be infinite in that the FTSE index could rise to infinity, but in practice a rise of 15-20% over three months could be considered extreme. (From the low of mid March to mid June 2003 the market rose by 22%).
However, provided one is not dealing naked but has merely sold the future ahead of sales of shares in the cash market, the loss on the future will be offset by the higher prices at which shares are sold in the cash market. Further the net short future position can be closed by buying the future to bring the net position to nil.
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