Chapter2-FuturesandForwardMarkets.pptVIP

Charles Cao 2. Futures and Forward Markets Summary Contract Specifications Margin Accounts Pattern of Futures Prices Contract Specifications The asset The contract size Delivery arrangement Delivery month Price quotes Position limit (1000, 300) Corn Futures Trading Unit 5,000 bu Deliverable Grades No. 2 Yellow at par and substitutions at differentials established by the exchange Price Quote Cents and quarter-cents/bu Tick Size 1/4 cent/bu ($12.50/contract) Daily Price Limit 12 cent/bu ($600/contract) above or below the previous day’s settlement price (expandable to 18 cent/bu) Contract Months Dec, Mar, May, Jul, Sep Ticker Symbol C Contract Specifications Closing out positions Enter into a contract that is the opposite of the original contract An example: March 6, long one July corn futures contract April 12, short one July corn futures contract Contract Specifications Closing out positions (cont.) Majority of the futures contracts do not lead to delivery Your gain or loss is determined by the change in the futures prices between March 6 and April 12 Margin Accounts Marking to markets At the end of each day, the margin account is adjusted to reflect the investor’s gain or loss Maintenance margin An example: Operation of Margins for a Long Position in Two Gold Futures Contracts The contract size is 100 ounces The price of gold futures is $400 per pounce The initial margin requirement is 5% The initial margin is $2,000 per contract or $4,000 in total The maintenance margin is $1,500 per contract or $3,000 in total Price Quotes Price quotes Opening price, the highest price, the lowest price Settlement price Open interest: aggregated long positions Crude Oil Futures Pattern of Futures Prices Futures price converges to the spot price of the underlying asset as the delivery month is approached Arbitrage activity between the futures and spot markets will make the two prices equal on the expiration day Simple vs. Continuous Compounding The effect of increa