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Futures market
,Forwards
Forward contract - an agreement between two parties involving the future delivery of a particular quantity of an asset at a price agreed upon today.
Buyers and sellers are obliged to deliver or take delivery. No money is exchanged until settlement. This may introduce default risk for some forward contracts. ,
Example Example: You buy a forward contract to receive delivery of Euros at an exchange rate of 1 $/€ in three months.
If in three months the spot rate is
1.2 $/€, you gain, since you get 1
Euro for each dollar through your forward contract, but the Euros are currently worth more: 1.2 dollars for each Euro. To think about it another way, you get one Euro for each dollar, whereas if you had waited, your dollar would have bought only 0.83 Euros. ,
Futures Futures contract - similar to a forward contract but it is entered into on an organized exchange and has standardized features (contract size, delivery date, acceptable grade of the commodity, etc.)
They have very low transactions costs. Commissions can run as low as .05% of the value of the contract. ,
History Rice contracts -
17th Century Japan
1848 CBOT established Financial Futures
1972 foreign currencies at
CME
1975 interest rate futures at CBOT
1982 stock index futures at
KBT, CME,
NYFE ,
Foreign Exchange Futures
Futures markets
Chicago Mercantile (
International Monetary Market)
London International Financial Futures Exchange MidAmerica
Commodity Exchange Active forward market ,Types of Contracts Agricultural commodities
Metals and minerals (including energy contracts)
Foreign currencies
Financial futures Interest rate futures
Stock index futures futures contract specifications can be found on:
http://www.duke.edu/~charvey/options/futures/f_idx
.htm ,
Frozen Pork Bellies FuturesTicker
Symbol: PB Trading
Unit': 40,
000 lbs. USDA-inspected 12-14, 14-16 pound or 16-18 pound (at a 21/2c discount) Pork Bellies
Price Quote: $ per hundred pounds (or cents/pound) Min Price Fluct: $.025 $10.00/tick
Daily Price
Limit: $
2.00 $800.00/contract
Contract Months: Feb, Mar, May, Jul, Aug Trading
Hours: 9:10 am-1:00 pm (Chicago
Time)
Last day: 9:10 am-12:00 pm
Last Day of Trading:
The business day immediately preceding the last 5 business days of the contract month.
Delivery Days: Any business day of the contract month. Delivery
Points: The CME
Clearing House or a current list of approved warehouses.
,
Key Terms for Futures Contracts
Futures price - agreed-upon price at maturity
Note that this is different than the price of a security, which is the price paid today for the security. A futures contract involves no exchange of money at the outset.
Long position - agree to purchase
Short position - agree to sell Profits on positions at maturity
Long = future spot price minus futures price
Short = futures price minus future spot price ,Key
Difference in Futures
Secondary trading - liquidity.
Standardized contract units.
Clearinghouse warrants performance. Unlike forwards, there is no default risk with futures.
Sellers do not have to be concerned about evaluating the credit risk of every different buyer, since the clearing house guarantees all transactions. ,Trading Mechanics Clearinghouse - acts as the counterparty to all buyers and sellers.
Obligated to deliver or supply delivery
Stands in the middle of the transaction between the long and short position $ $ Long
Position Short Position Clearinghouse commodity ? commodity ?
,
Margin Accounts When buying a contract, the buyer must post a performance bond; that is, deposit money in a margin account, usually 20 percent of the value of the contract.
Note that this margin account is NOT the same as a stock margin account in which a buyer is making a down payment and borrowing funds from the broker to complete the sale. Since the account earns interest, there is no cost to you, the buyer, of posting the performance bond. ,Margin and Trading Arrangements
Initial Margin - funds deposited to pr
- published: 02 Jun 2016
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