Chapter 10: Introduction to Financial Futures MarketsFutures contract – agreement that requires a party to either buys/sell something at a designated future date at a predetermined priceI. 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 fluctuationsForward 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 obligationReverse cash and carry trade – strategy a security is sold short and proceeds received from the short sale are investedCash and carry trade – involves borrowing cash to purchase a security to the futures settlement date
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theoretical futures price, futures markets Futures, net financing cost, futures settlement date