It is well-known that markets in stock index futures or more generally, in baskets of securities, offer a preferred trading medium for uniform liquidity traders who wish to trade portfolios as adverse selection costs are typically lower in these markets than in other individual securities. This article explains the immense liquidity and popularity of markets in stock index futures.

Stock index futures are an indispensable tool for market risk management. The equity index trading commenced a century ago, whereas the equity index futures is a more recent investment instrument being only two decades old.

There are three hedging strategies that are available using index futures. Nearly three dozen countries have developed stock index derivatives. The first stock index futures contract in the world was evolved at Kansas City Board of Trade (KCBT) on February 24, 1982.

One of the unique features of stock index futures is that, one cannot buy an index, the only way to buy stock index is by buying futures and options contracts written on a stock index. Since we cannot take physical delivery of index; all the stock indexes available are cash settled. Stock index futures provide us with good diversification benefit without owning the individual equity shares. Institutional investors use stock index futures extensively for asset allocation as it is the quickest, cheapest and the most reliable tool to adjust their asset allocation. It is also used widely by mutual funds for hedging/insuring their portfolios and/or for enhancing the yields by writing covered call options on stock index futures.

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