The Explanation in Theory of the Overseas Stock Index Futures and Option Markets Developing in Parallel

In order to illustrate why the mature stock index futures and option markets develop in parallel, this paper develops an expected utility maximization model to choose the optimal hedging alternatives when a fund company facing the stock market price change use the stock index futures and stock index option portfolios to avoid the risk. The main results are as follows: suppose that stock index futures and options markets are unbiased, a full hedge on stock index futures market is optimal and a stock index option is redundant; suppose that the stock index futures market is biased whereas the stock index options market is unbiased, a hedge on both stock index futures and options market is optimal and a stock index option is necessary. This conclusion gives evidence that China should continuously develop the index derivatives markets. Thus, it further suggests that with the steady operation of Shanghai-Shenzhen 300 stock index futures, China could launch the stock index options with the same underlying index in due time and form a pattern that stock index futures and option markets develop in parallel.