An equity index or stock index trac

An equity index or stock index tracks changes in the value of a hypothetical portfolio of stocks. An equity index future is an agreement between a party and the futures exchange to buy and sell the index of the stock exchange at a certain time in future, at an agreed price. For example, A can go long (buy) the Nikkei 225 at 10995 that expires in June 2010. Come expiry, if the actual index stands at 11100, A would have made a profit of 105 (11100-10995). The principle is not very different from the Tulip forward in the previous article, just with the underlying being an equity index. Index futures contracts are always cash settled as there is nothing to 'actually buy or sell' in case of an index. You simply pretend that you are buying the 'index' and cash settle it at the expiry date. Leeson was long the Nikkei 225 equity index futures.