The_Banker_Fri_1.pdfVIP

THE BANKER Henry Liang blog.HenryL me@HenryL Derivatives 97 1. Futures 98 Long and Short • Party A agrees to long a Treasury bill from Party B (short) 30 days from now at a price of $1000. • Suppose1: in 30 days: the spot price is traded at $900; The Long has to pay $100 to the Short. • Suppose2: in 30 days : the spot price is traded at $1100. The Short has to pay $100 to the Long. • Spot Forward: long receives payment • Spot Forward: short receives payment • Futures is a zero-sum game. Winning or loss depends on traders’ speculation. 99 Henry Liang Notes Features of futures • Default risk: one party fails to perform his payment. • Cash settlement: the losing party is obligated to pay the cash amount to the winning party. • Delivery: to deliver the actual goods. • Futures contracts are highly standardized and traded on organized exchanges. • Tick size: the basic price movement • One lot • Daily price limit: limit up, limit down, locked limit • Margin and leverage: the money deposited by both the long and the short, no interest charges. 100 Henry Liang Notes Lock in • A trader short a T-bill in 20 days for $992, and later on, long an identical T-bill in 20 days for $990. Thus he has “locked in” a $2 gain, regardless of the market price of the T-bill at the settlement date. • Suppose the spot price in 20 days = $1000 Long contract: gain 1000-990=$10 Short contract: lose 1000-992=$8 • Suppos