Index futures achieve outsized leverage through small initial margins on large notional value.

Evidence

A cash-settled index future contract worked and, some details aside, still works as follows. (I draw my example from Martin 1988, pp. 139-140.) Suppose the S&P 500 index level was 285.00, and a future on the index, maturing in three months, can be bought at 286.40. The “contract multiplier” in the 1980s was 500, so a single contract had a notional value of the index level (285) multiplied by 500, or 142,500. The purchaser of such a contract, however, had to deposit with the Mercantile Exchange's clearinghouse only an "initial margin" of 10,000 (which could, for example, be in the form of U.S. Treasury bills, so one does not have to forgo interest on the margin payment). The seller also had to deposit a similar margin. — Donald MacKenzie, An Engine, Not a Camera, 775

Categorization

• DEFINE: Concretely defines contract multiplier, notional value, and initial margin for a cash-settled index future with a worked example.
• XREF: connects to: Leverage amplifies percentage returns, making options riskier than underlying stock — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 535; Investors who take bigger risks receive proportionally larger returns. — Nicolas Baumard, A mutualistic approach to morality: The…, 151

Broader Connections

• Leverage amplifies percentage returns, making options riskier than underlying stock #expands (0.78) — Donald MacKenzie, An Engine, Not a Camera, 535
• Investors who take bigger risks receive proportionally larger returns. #expands (0.70) — Nicolas Baumard, A mutualistic approach to morality, 151