Fin9770BrighamCh23NA78-97.ppt - Marking to the market • F= the price on(contract date)future delivery on(settlement date • F changes daily during

Fin9770BrighamCh23NA78-97.ppt - Marking to the market •...

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Marking to the market F= the price on 1/1/19 (contract date)future delivery on 1/30/19 (settlement date) F changes daily during the period between these dates. Therefore, rather than waiting until delivery date, a cash settlement occurs on each day. when F goes up, buyer(long) receives payment and seller(short) makes a payment when F goes down, seller(short) receives payment and buyer(long) makes a payment Payments =∆F are made thru “The exchange”
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Relation between F and S As delivery date approaches, futures price( F) approaches spot price( S ) F and S are prices per unit: e.g. price per bushel, per barrel, per gal. etc. Date S F (Jan 30 delivery) Jan 1: $2.00 $2.15 Jan 29 $ 2.29 $2.31 Jan 30 $2.30 $2.30 On Jan 30 the F for Jan 30 delivery is the spot price
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Example: contract date: 1/1/19 F=$2.15 settlement date= 1/30/19 Q= 5000 Mr. Long has bought and Mr. Short has sold date: F F x Q Mr Long receives (pays) 1/2/19 $2.18 $ .03 x5000 ……………… $ 150 1/3/19 $2. 20 $ .02 x 5000 …………… 100 1/4/19 $2.19 $-.01x5000………………. ( 50) 1/5/19 $2.18 $ - .01x 5000………………. (50) 1/6/19 $2.25 $.07x5000………………. 350 1/7/19 $2.28 $ .03x 5000 …………… 150 1/8/19 $2.30 $.02 x 5000………….. 100 no further change . 1/30/19 $2.30 $0x5000 0 ------------ $ 750
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What if there were a cash settlement on settlement date (instead of marking to the market)? Cash settlement(on Jan. 30): buyer gets and seller pays( $2.30 - $2.15)x 5000 = $750 Marking to market has same result as cash settlement on settlement date only, but less likelihood of default on full payment.
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Question for you On 1/1/19 the futures price for gasoline for delivery on 1/30/19 is F=$2.10 per gallon. The spot price on 1/1/19 is S=$2.20 per gallon. On 1/1/19 You go long on 5000 gallons for 1/30/19 delivery. Next day: 1/2/19 The spot price is S= $2.15 and the futures price for 1/30/19 delivery is F= $2.07 As a result of marketing to the market you will: clicker coming
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You will : 1. Pay $250 2. Receive $150 3. Pay $150 4. None of the above
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