In
finance, a single-stock future (SSF) is a type of
futures contract between two parties to exchange a specified number of stocks in a company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts can be later traded on a
futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity o ...
.
The party agreeing to take delivery of the underlying stock in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to deliver the stock in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties - the buyer hopes or expects that the stock price is going to increase, while the seller hopes or expects that it will decrease. Because entering the contract itself costs nothing, the buy/sell terminology is a linguistic convenience reflecting the position each party is taking - long or short.
SSFs are usually traded in increments/lots/batches of 100. When purchased, no transmission of share rights or dividends occurs. Being futures contracts they are traded on margin, thus offering leverage, and they are not subject to the
short selling limitations that stocks are subjected to. 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.
SSFs in the U.S.
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, a joint venture of three previously-existing
Chicago
(''City in a Garden''); I Will
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-based exchanges, the
Chicago Board Options Exchange,
Chicago Mercantile Exchange and the
Chicago Board of Trade. In 2006, the brokerage firm
Interactive Brokers made an equity investment in
OneChicago and is now a part-owner of the exchange.
As of September 2020 OneChicago has been closed.
Pricing
Single stock futures values are priced by the market in accordance with the standard theoretical pricing model for forward and futures contracts, which is:
:
where F is the current (time t) cost of establishing a futures contract, S is the current price (spot price) of the underlying stock, r is the annualized
risk-free interest rate, t is the present time, T is the time when the contract expires and PV(Div) is the
Present value of any dividends generated by the underlying stock between t and T.
When the risk-free rate is expressed as a continuous return, the contract price is:
:
where r is the risk free rate expressed as a continuous return, and e is the base of the natural log. Note the value of r will be slightly different in the two equations. The relationship between continuous returns and annualized returns is r
c = ln(1 + r).
The value of a futures contract is zero at the moment it is established, but changes thereafter until time T, at which point its value equals S
T - F
t, i.e., the current cost of the stock minus the originally established cost of the futures contract.
See also
*
Commodity Futures Trading Commission
*
OneChicago
References
External links
OneChicago - The Single Stock Futures ExchangeCommodity Futures Trading Commission- the main federal agency that regulates futures and the exchanges in the United States.
Saratoga Capital Market Commentary
{{derivatives market
Derivatives (finance)