EFTA01393110.pdf

CHAPTER W INDEX OPTIONS ABOUT INDEXES As referred to in this booklet. an index is a measure of the prices of a group of securities* or other interests. Although indexes have been developed to cover a vari- ety of interests, such as stocks and other equity securi- ties, debt securities and foreign currencies, and even to measure the cost of living. indexes on equity securi- ties (which are called stock indexes) are among the most familiar, and they are the only indexes that under- lie options trading at the date of this booklet. The following discussion refers only to stock indexes and stock index options. Stock indexes are compiled and published by vari- ous sources, including securities markets. An index may be designed to be representative of the stock market of a particular nation as a whole, of securities traded in a particular market, of a broad market sector industrials). or of a particular industry (e.g.. elec- tronics). An index may be based on the prices of all, or only a sample, of the securities whose prices it is in- tended to represent. Indexes may be based on securi- ties traded primarily in U.S. markets, securities traded primarily in a foreign market, or a combination of secu- rities whose primary markets are in various countries. A stock index, like a cost of living index, is ordinarily expressed in relation to a "base" established when the index was originated. EXAMPLE: On the starting or "base" date for a new value-weighted index, the total market values of the component securities (market price times number of shares outstanding) is $50 billion. The publisher of the Index will assign an arbitrary index level—say 100—to that base value. it the total market value of the component stocks increases by 2% the next day to $51 billion), the index level would rise to 102 (102% of the base level of 100). 'Some Indexes reflect values of companies, rather than SOCuri- ties, by taking into account both the prices of constituent securi- ties and the number of those securities outstanding. 23 CONFIDENTIAL - PURSUANT TOMIEBERMI$066508 P. 6(e) CONFIDENTIAL SDNY_GM_00244692 EFTA01393110