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Narrow Based Index Construction

Narrow-based indices are constructed by selecting a number of stocks in a particular economic sector as deliverable components of the index. OneChicago follows an approximately equal dollar-weighted approach when constructing narrow-based indices.

Using this approach, the number of shares of the deliverable components of the index is weighted to approximately equalize the cash value contribution of each index component. OneChicago uses simple linear dollar weightings, with the results rounded to the nearest 100 shares. For example, a stock trading at $15 per share would have approximately twice as many shares in a OneChicago narrow-based index as would a stock trading at $30 per share.

Index Values and Prices

The cash value of each index component is the cash market price of a single share of the component’s underlying security multiplied by the number of deliverable shares of that security in the index.
The cash value of the index itself is the sum of all index component values.
The divisor (or multiplier) for all OneChicago narrow-based indices is 500. The theoretical cash price of the index is therefore determined by dividing the cash value of the index by 500.
The minimum price change (tick size) is $.01. This results in a tick value of $5.00 ($.01 x 500 = $5.00).

Example Index

Index Component	Cash Price	Shares in Index	Value
Stock 1	$24.32	300	$7,296
Stock 2	$27.40	300	$8,220
Stock 3	$84.00	100	$8,400
Stock 4	$16.75	500	$8,375
Stock 5	$7.34	1,100	$8,074
Cash value of index			$40,365
Divisor		500
Cash price of index	$80.73

In the example index above, Stock 3 is trading at a price that is approximately 11.4 times higher than the price of Stock 5. In order to create an approximately equal dollar-weighted index, there are therefore 11 times as many shares of Stock 5 as Stock 3. (11.4 x 100 = 1,100 when rounded off to the nearest 100 shares).

When the cash values of all the components of the index are added together, the sum is $40,365. Dividing this by 500 (the divisor) results in a theoretical cash price of $80.73 for the index.

See the discussion of security futures pricing for information on the relationship between the cash price and the price at which futures contracts may actually trade.

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