he Value Line Composite Index (VLCI) is an equally weighted geometric T average of close to 1700 stock prices (1500 industrials 180 utilities and 20 rails). It covers the majority of New York Stock Exchange (NYSE) stocks, a portion of the American Stock Exchange and Over-The-Counter stocks and some Canadian Stocks. Together these stocks represent about 90% of the dollar volume of trade in American Equity markets.
Among the recent innovations in financial markets are options on the Value Line Composite Index (VLCI) that have been traded on the Philadelphia Stock Exchange (PSE) since January 11, 1985. VLCI futures contracts have been traded on the Kansas City Board of Trade (KCBT) exchange since February 24, 1982.' Unlike arithmetic-average indexes, such as the NYSE and the Standard and Poor's indexes, the VLCI because of its geometric averaging cannot be dupli-
The second author acknowledges the financial support of the Research Foundation of the City University of New York.
'The VLCI futures contracts are traded on the Kansas City Board of Trade in a three-month delivery cycle in March, June, September, and December. The delivery is at the third Friclay of the contract month, and a cash settlement is used, based on the difference between the VLCI spot value and its corresponding futures price. Futures contracts are valued at either $500 times the VLCI (MAXI) or at $100 times the VLCI (MINI). There are no daily price limits. The minimum tick is $25 and $5 for the MAXI and MINI contracts, respectively.
The VLCI options are traded on the Philadelphia Stock Exchange, and are available in unit trading of $100 times the index with an expiration cycle which includes all 12 months. Expiration occurs on the Saturday following the third Friday of the expiration date. The aggregate exercise price is found by multiplying the expiration price by $100. In the case of exercise, a cash settlement is used, based on the difference between the closing VLCI spot value and the option exercise price times $100. It should be emphasized that the VLCI options are options on the spot index and not options on futures. As opposed to the S&P 500 or the NYSE options, for which both options on the spot and on the futures contracts are available for trade.