Futures and Risk Management - FuturesandRisk Management...

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Futures and Risk  Management Professor David McLean Alberta School of  Business
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Major Concepts Defining Forward and Futures Terminology Major differences Why use forwards and futures? Pricing Futures and Forwards No Arbitrage Some Applications with Financial Futures Swaps 2
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Futures and Forwards Forward - an agreement calling for a future delivery of an asset at an agreed-upon price Futures - similar to forwards but have formalized and standardized characteristics Key difference with futures vs. forwards Secondary trading - liquidity Marked to market Standardized contract units Clearinghouse warrants performance 3
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Futures Contracts Terminology Futures price - agreed-upon price at maturity Spot price – current market price of the underlying asset Long position - agree to purchase Short position - agree to sell Profits on positions at maturity Long = spot minus original futures price Short = original futures price minus spot 4
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Why Use Futures? Speculation short - believe price will fall long - believe price will rise Hedging long hedge - protecting against a rise in price short hedge - protecting against a fall in price 5
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Types of Futures Contracts 6
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Futures Trading Mechanics Clearinghouse Facilitates trading; may be intermediary between two traders Closing out positions Reversing trade Take or make delivery Most trades reversed and do not involve actual delivery Open interest Open contracts no offset with reversing trade 7
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Trading with and without Clearinghouse 8
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Futures Contract Example Yesterday, you bought 10 December live-cattle contracts on the CME, at a price of $0.7455/lb.
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