tailieunhanh - Lecture Finance - Topic 10: Futures markets

This topic presents the following content: Forward vs. futures markets, purposes of futures markets, taxation of futures contracts, futures markets terms, reading futures prices (contracts), trading commodities, financial futures. | 1 Futures Topic 10 I. Futures Markets 2 A. Forward vs. Futures Markets 1. Forward contracting involves a contract initiated at one time and performance in accordance with the terms of the contract occurring at a subsequent time. Example: A highly prized St. Bernard has just given birth to a litter of pups. A buyer agrees to buy one pup for $400. The exchange cannot take place for 6 weeks. The buyer and seller agree to exchange (sell) the pup in 6 weeks for $400. This is a forward contract; both parties are obligated to go through with the deal. 3 A. Forward vs. Futures Markets (continued) 2. Differences b/w Forward and Futures Markets a. The Organized Exchange b. Contract Terms--standardized item c. The Clearinghouse--takes no active position in the market, but interposes itself between all parties to every transaction. The number of contracts bought must always equal the number of contracts sold. 4 A. Forward vs. Futures Markets (continued) d. The Requirement for Daily Resettlement . | 1 Futures Topic 10 I. Futures Markets 2 A. Forward vs. Futures Markets 1. Forward contracting involves a contract initiated at one time and performance in accordance with the terms of the contract occurring at a subsequent time. Example: A highly prized St. Bernard has just given birth to a litter of pups. A buyer agrees to buy one pup for $400. The exchange cannot take place for 6 weeks. The buyer and seller agree to exchange (sell) the pup in 6 weeks for $400. This is a forward contract; both parties are obligated to go through with the deal. 3 A. Forward vs. Futures Markets (continued) 2. Differences b/w Forward and Futures Markets a. The Organized Exchange b. Contract Terms--standardized item c. The Clearinghouse--takes no active position in the market, but interposes itself between all parties to every transaction. The number of contracts bought must always equal the number of contracts sold. 4 A. Forward vs. Futures Markets (continued) d. The Requirement for Daily Resettlement Assume that the contract closes on May 2 at 168¢/bushel. This means that A has sustained a loss of 3¢. Since there are 5000 bu. in the contract this represents a loss of $150. This amount is deducted from the margin deposited with the broker. 5 A. Forward vs. Futures Markets (continued) Assume initial margin was $1400 and maintenance margin is $1100. A has already sustained a loss of $150 so the value of the margin account is $1250. If the price drops by 4¢ the following day another $200 loss is registered. The value of the margin account is down to $1050, below the maintenance margin. This means A will be required to bring the margin account back to $1400. 6 Table 1 Futures Market Obligations. The oat contract is traded by the CBT. Each contract is for 5000 bushels, and prices quoted in cents per bushel. 7 Table 1 (continued) A May 1: Buys 1 Sept. contract for oats at 171 cents/bushel A Buys 1 Sept. contract for oats at 171 cents/bushel B Sells 1 Sept. contract for oats at 171 .