Single-stock futures

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Single-stock futures (SSF's) are futures contracts with the underlying asset being one particular stock, usually in batches of 100. When purchased, no transmission of share rights or dividends occur. Being futures contracts they are traded on margin, thus offering leverage. 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 previously-existing Chicago-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.

SSFs have yet to gain significant popularity among securities & derivatives traders in the United States. Daily total contract volume [2] averaged approximately 26,000 contracts/day in December 2005. Although 2005 total annual volume did increase 188% over 2004, 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:

F = P \cdot (1 + r) - Div \

where F is the single-stock futures contract price, P is the underlying stock price, r is the annualized interest rate, and Div is the expected dividend.

Another valuation of single stock futures can be found through the following:

F = [S - PV(Div)] \cdot e^{r \cdot (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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