Chapter 10 - Chapter 10 Introduction to Financial Futures...

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Chapter 10: Introduction to Financial Futures Markets Futures contract – agreement that requires a party to either buys/sell something at a designated future date at a predetermined price I. Mechanics of Futures Trading - clearinghouse guarantees the two parties transactions will occur - additional margin deposited is variation margin - rationale for daily price limits is that they provide time for market participants to digest or reassess new information that causes futures price to exhibit extreme fluctuations Forward contract – nonstandard (terms negotiated individually) and no clearinghouse coordinates forward trading; over the counter instrument - parties exposed to credit risk because either party may default on obligation Reverse cash and carry trade – strategy a security is sold short and proceeds received from the short sale are invested Cash and carry trade – involves borrowing cash to purchase a security to the futures settlement date
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