ICM308-Stock Index Futures

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Level:7
Terms in which taught: Summer term module
Pre-requisites:
Non-modular pre-requisites:
Co-requisites:
Modules excluded:
Current from: 2023/4

Module Convenor: Prof Charles Sutcliffe
Email: c.sutcliffe@icmacentre.ac.uk

Type of module:

Optional

Summary module description:

This is a less quantitative option that offers an in-depth study of an important financial product - stock index futures. For almost all countries, the value of trading in stock index futures exceeds the total value of trading in all the equities listed on the underlying stock market. So stock index futures are very liquid financial instruments with an important role in financial markets. They are used by fund managers, arbitrageurs, hedgers, speculators, investment banks, pension funds, etc. for a wide variety of reasons. The aim of this module is to understand why this very large market exists, and how it works. Much of this material on how stock index futures markets work also applies to other futures markets, e.g. currencies, energy, metals, agricultural commodities.

Aims:

The aim of this module is to give students an understanding of the very large and important global financial markets in futures on national stock market indices. 

Assessable learning outcomes:

The assessable learning outcomes for this module include the following:-

• discuss the different ways of constructing stock market indices and the implications of these differences


• describe various features and characteristics of the process of trading stock index futures 


• discuss the identity and characteristics of some of the close substitutes for stock index futures


• explain how stock index futures can be priced using a simple arbitrage relationship


• discuss basis and spread trading of stock index futures 


• explain how stock index futures can be used for hedging the price risk of the underlying basket of shares 


• evaluate various other uses that fund managers make of stock index futures.


• critically evaluate the design and regulation of stock index futures

Additional outcomes:

This module will give students a solid understanding of one type of heavily traded financial instrument - stock index futures, and most of this knowledge is also applicable to futures contracts on other underlying assets. Many of the methods and procedures for trading stock index futures are also applicable to options on equities, metals, agricultural commodities, currencies, energy etc. 

The class work exercises will improve the ability of students to solve small numerical problems.

Outline content:

1. Stock Market Indices


2. Introduction to Trading Stock Index Futures


3. Arbitrage and the Valuation of Stock Index Futures


4. Arbitrage in Practice of Stock Index Futures


5. Basis and Spread Trading of Stock Index Futures


6. Maturity, Price Volatility and Volume of Stock Index Futures


7. Market Efficiency of Stock Index Futures


8. Hedging Using Stock Index Futures


9. The Uses of Stock Index Futures by Fund Managers


10. The Design and Regulation of Stock Index Futures

Global context:

Stock index futures are traded on the equity market indices of most countries, using the same methods and procedures. So the content of this module is applicable globally.  This  module’s content is also applicable to futures traded globally on most other types of underlying asset e.g. metals, energy, commodities, currencies, agricultural products, etc.

Brief description of teaching and learning methods:

Lectures are used to introduce the concepts covered in this module. The seven seminars allow students to discuss short numerical classwork problems which illustrate the concepts covered in this module.

Summative assessment- Examinations:

One 2 hour exam.

The examination for this module will require a narrowly defined time window and is likely to be held in a dedicated exam venue.

Summative assessment- Coursework and in-class tests:

One 1 hour multiple choice test. This will take place after all the lectures and classes have been completed.

Formative assessment methods:

The seven classworks, with about three to five short numerical questions in each, allow students to improve their understanding of the material covered in the lectures. Feedback on these problems is provided in the classes. The mark on the multiple choice test provides feedback on performance that is available before the examination.

Penalties for late submission:

The below information applies to students on taught programmes except those on Postgraduate Flexible programmes. Penalties for late submission, and the associated procedures, which apply to Postgraduate Flexible programmes are specified in the policy “Penalties for late submission for Postgraduate Flexible programmes”, which can be found here: https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmissionpgflexible.pdf

The Support Centres will apply the following penalties for work submitted late:

• where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days;


• where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

The University policy statement on penalties for late submission can be found at: https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmission.pdf

You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Assessment requirements for a pass:

50%

Reassessment arrangements:

A resit examination worth 100%.

Additional Costs (specified where applicable):

Last updated: 30 March 2023