Launching Stock Index Futures in China: Theoretical Demonstration and Contract Design

It is imperative that stock index futures be launched in China to promote the development of stock market and the implementation of risk management. In China conditions are already ripe for launching stock index futures, but some aspects such as laws, regulations and the computation method of underlying index still need improving. The introduction of index futures does not necessarily cause financial crises or increase market volatility , so long as proper checks are in place to prevent unwarranted speculation and to control risks. The underlying index should include 300 sample stocks enlisted in both the Shanghai and the Shenzhen stock markets. The integration of international practices with China's specific situation should be considered in the design of the stock index futures contract. The settlement price of the contract should be the average of quotations of the composite index taken at five - minute intervals during the last trading day.