Ch 13 - Chapter 13 Financial Futures Markets 1 Background...

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1 Chapter 13 Financial Futures Markets
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2 Background on Financial Futures Financial futures contract A standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date Futures are traded on organized exchanges Interest rate futures are on debt securities Stock index futures are on stock indexes
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3 Purpose of trading financial futures Speculators take positions to profit from expected changes in the price of futures contracts over time Hedgers take positions to reduce their exposure to future movements in interest rates or stock prices
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4 Structure of the Futures Market Members of a futures exchange are either: Commission brokers Floor traders (locals) Many types of futures contracts now trade over the counter Electronic trading GLOBEX CBOE
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5 Structure of the Futures Market Margin requirements “marked to market” daily Order types market order limit order
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6 How orders are executed Brokerage firms communicate customers’ order to telephone stations located near the trading floor Floor brokers accommodate orders When two traders on the floor reach an agreement through open outcry, the information is transmitted to the customers Floor brokers receive transaction fees in the form of a bid-ask spread The futures exchange acts as a clearinghouse
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7 Interpreting Financial Futures Tables
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8 Treasury Futures
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9 Valuation of Financial Futures The price of a financial futures contract generally reflects the expected price of the underlying security as of the settlement date Factors that influence futures’ price: The current price of the asset Economic or market conditions Impact of the opportunity cost Dividend payments
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10 Explaining Price Movements of Bond Futures Contracts Employment GDP Retail sales Industrial production Consumer confidence Inflation indicators Indicators that reflect the amount of long-term financing
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11 Speculating with Interest Rate Futures The position taken depends on interest rate expectations If interest rates are expected to decline, purchase T- bill futures If interest rates are expected to increase, sell T-bill futures
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This document was uploaded on 11/29/2009.

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Ch 13 - Chapter 13 Financial Futures Markets 1 Background...

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