SHOULD THERE BE A LOCAL MARKET INDEX FUTURES CONTRACT? IF YES, WHICH ONE?

Abstract

On 24 Feb 1982, the first Stock Index Futures (SIF) contract was introduced at the Kansas City Board of Trade. It was based on the Value Line Composite Index. After that, one SIF after another began to appear on the scene and they have, in general, experienced enormous success. SIFs are currently the second most traded financial futures in the US. Futures contracts are legally binding agreements between two parties to exchange a certain quantity of a particular good or service at a particular price at a future time and place. SIFs are futures based on an index, and as such can be considered as a contract to buy or sell 'the market' . In Singapore, financial futures trading began on 7 Sep 1984. On 3 Sep 1986 the Nikkei Stock Average (NSA) futures contract was traded. There is, however, no SIF contract at SIMEX, which is based on a local index. Should there be one? The answer lies in the usefulness of such a contract, and the impact of such a contract on the local bourse. If such an instrument is useful to financial agents here, and if the introduction of this contract does not have any serious negative impacts, then perhaps there should be one. As Singapore is trying to develop its financial centre, the development of such an instrument should be seriously studied. If there should be one, the next question would be which of the local indices would be appropriate. There are over twenty indices to choose from, each with its own characteristics. So far, most interest has been shown in the SES All-Share index. As the choice of indices is likely to effect the success of a local SIF, this is one point that needs to be considered.