chapter1 - CHAPTER 1 Futures Markets Introduction In this...

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Chapter 1 1 CHAPTER 1 Futures Markets Introduction In this chapter, we introduce futures markets and their key players. This chapter is organized into the following sections: 1. Forward Contracts Versus Futures Contracts 2. Institutions Facilitating Futures Trading 3. Structure of Futures Exchanges 4. Clearinghouses’ Role in Futures Markets 5. Types of Futures Contracts 6. The Social Function of Futures Markets 7. Futures Markets’ Regulatory Framework and Taxation
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Chapter 1 2 Forward Contracts A forward contract is an agreement between two parties (counterparties) for the delivery of a physical asset (e.g., oil or gold) at a certain time in the future for a certain price that is fixed at the inception of the contract. Forward contracts can be customized to accommodate any commodity, in any quantity, for delivery at any point in the future, at any place.
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Chapter 1 3 EXAMPLE: St. Bernard Puppy Counterparties: Buyers and Seller Asset/Commodity: St. Bernard Pup Delivery/Payment Time: 6 weeks Priced Fixed: $400 Buyer: Dog Fancier has a long position Seller : Breeder has a short position Trading Volume: Occurs when one trader buys & another sells Open Interest: Number of open contracts obligated for delivery If the dog owner had completed similar contracts for six different dogs, the open interest would be 6.
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Chapter 1 4 Future Contracts Futures contracts are highly uniform and well-specified commitments for a carefully described good (quantity and quality of the good) to be delivered at a certain time and place (acceptable delivery date) and in a certain manner (method for closing the contract) and the permissible price fluctuations are specified (minimum and maximum daily price changes).
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Chapter 1 5 Forward Versus Futures COMPARISON FORWARD FUTURES Trade on organized exchanges No Yes Use standardized contract terms No Yes Use associate clearinghouses to guarantee contract fulfillment No Yes Require margin payments and daily settlements No Yes Close easily No Yes Regulated by identifiable agencies No Yes Any quantity Yes No Any product Yes No
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Chapter 1 6 Futures Contract Standardized Terms 1. Quantity 2. Quality 3. Expiration months 4. Delivery terms 5. Delivery differentials 6. Delivery dates 7. Minimum price fluctuation 8. Daily price limits 9. Trading days and hours
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Chapter 1 7 CBOT Wheat Futures Contract Quantity : 5,000 bushels per contract. Quality: No. 2 Soft Red, No. 2 Hard Red Winter No. 2 Dark Northern Spring, or No. 1 Northern Spring. Expiration : July, September, December, March, & May. Delivery Terms : Wheat must be delivered at a “regular” or approved warehouse (e.g., warehouses located Chicago Switching District). Delivery: Any business days in the delivery month. Payment:
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This note was uploaded on 02/28/2010 for the course MBA 87 taught by Professor Dpg during the Spring '10 term at Indian Institute Of Management, Kolkata.

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chapter1 - CHAPTER 1 Futures Markets Introduction In this...

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