Index futures are a futures contracts on a financial index. For each index there may be a different multiple for determining the price of the futures contract.
Index futures are used for hedging, trading, and investments. Hedging using index futures could involve hedging against a portfolio of shares or equity index options.
For example, the S&P 500 Index is one of the most widely traded index futures contracts in the U.S. Stock portfolio managers who want to hedge risk over a certain period of time often use S&P 500 futures to do so.Trading using index futures could involve, for instance, volatility trading. Investing via the use of index futures could involve exposure to a market or sector without having to actually purchase shares directly.

Futures contracts are also available on these indices. This helps traders make money on the performance of the index.

For example, suppose the CNX Nifty value was 6500 points. The exchange stipulates that each point is equivalent to Rs 1, then you have to pay 100 times the index value – Rs 6, 50,000 i.e. 1x6500x100. This also means each contract has a lot size of 100.

The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for International Settlements at USD 130 trillion.

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Pramod Baviskar

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