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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Single Stock Futures (SSF's) are securities that share some of the features of equities and also some of traditional commodity futures contracts. They are traded in various financial markets, including those of the United States, United Kingdom, Spain, India and others. South Africa currently hosts the largest single-stock futures market in the world, trading on average 700,000 contracts daily[1].
In the United States, they were disallowed from any exchange listing in the 1980s because the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission were unable to decide which would have the regulatory authority over these products.
After the Commodity Futures Modernization Act of 2000 became law, the two agencies eventually agreed on a jurisdiction-sharing plan and SSF's began trading on November 8, 2002.
Two new exchanges initially offered security futures products, including single-stock futures, although one of these exchanges has since closed. The remaining market is known as OneChicago because it is a joint venture of three Chicago-based exchanges, the Chicago Board Options Exchange,CME Group ( formerly the Chicago Board of Trade and the Chicago Merc). In 2006, the brokerage firm Interactive Brokers made an equity investment in OneChicago and is now a part-owner of the exchange.
SSFs have yet to gain significant popularity among securities & derivatives traders in the United States. Daily total contract volume [2] averaged approximately 35,000 contracts/day in 2007. Although 2007 total annual volume did increase 100% over 2006, volumes are still small in comparison to more established derivative contracts. For example, U.S. equity & ETF options trade approximately 6,000,000 contracts/day.
Single stock futures values are priced by the market in accordance with a theoretical pricing model based on a formula:
Futures Price = underlying stock price X (1+ annualized interest rate - dividend)
The SSF's valuation with its Interest Rate component allows one to set a competitive rate of financing when using a margin account.
Another valuation of single stock futures can be found through the following:
F = [S - PV(Div)] * e^(r*(T-t))
where S is the price of the underlying (the stock price), PV(Div) is the present value of any dividends entitled to the holder of the underlying between T and t, r is the risk free rate, and e is the base of the natural log. F is of course the price of the single stock futures contract. [3]
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