Equity Index Future
Also known as: Index futures, E-mini, Single-stock future
A standardised, exchange-traded promise to buy or sell the market at a set price on a set date.
- Asset class
- Equity derivatives
- Instrument type
- Future (linear)
- Traded
- Exchange, centrally cleared
- Typical users
- Asset managers, hedge funds, index arbitrageurs
BeginnerWhat is it, really?
A future is a binding agreement today on a price for a future date. An S&P 500 future struck at 5,000 obliges the buyer to "take delivery" of the index level at expiry: if the index ends at 5,200 the buyer gains 200 points; at 4,800 they lose 200. Unlike an option there is no choice and no premium — just a locked-in price, with symmetric gains and losses.
Futures trade on exchanges in standard sizes and dates, and a clearing house stands between every buyer and seller, so you never worry about the other side defaulting. To trade you post margin — a good-faith deposit of a few percent of the contract's value — which makes futures powerful and dangerous: a 5% margin means 20x leverage.
IntermediateHow it works in practice
Daily settlement
Futures are marked to market daily: every evening, gains are credited and losses debited in cash ("variation margin"). Your position economically resets each day — which is why a futures P&L hits your account long before expiry. Index futures are cash-settled: no shares change hands, just the final difference.
Why the future ≠ the index
The future usually trades above or below the spot index. Holding stocks costs money (funding) but earns dividends; the future does neither. Fair value reflects this cost of carry, and the gap ("basis") converges to zero at expiry.
Uses
- Beta management: a pension fund equitises cash inflows instantly with futures, then buys stocks at leisure.
- Hedging: shorting futures against a portfolio strips out market risk without selling holdings.
- Rolling: positions are maintained by selling the expiring contract and buying the next ("the roll"), whose price embeds funding and dividend expectations.
AdvancedPricing & valuation
Cost-of-carry pricing
Cash-and-carry arbitrage (buy the basket with borrowed money, sell the future) enforces, with financing rate \(r\) and dividend yield \(q\):
With discrete dividends, \(F_0 = (S_0 - \text{PV(divs)})\,e^{rT}\). If the traded future sits above fair value, arbitrageurs sell futures and buy stock (and vice versa), pinning the basis to funding and dividend expectations.
What the basis tells you
The implied financing rate backed out of the futures roll is a market price of balance-sheet capacity. When dealers' balance sheets are scarce (regulation, year-end), equity futures can trade "rich", meaning longs pay above risk-free funding — measurable as the spread of the implied repo rate over OIS.
Margin and tail risk
Initial margin is set from tail-risk models (historical/filtered VaR, e.g. ~99.5% over a 1–2 day horizon). Leverage means variance drag and forced liquidation risk: a position sized at margin minimum can be stopped out by a move the underlying later recovers from.
Futures vs. forwards
Daily settlement makes futures prices differ slightly from forward prices when rates correlate with the underlying (the convexity adjustment) — negligible for short-dated equity futures, material for long-dated rate futures.