chapter2 - CHAPTER 2 Futures Markets Refinements In this...

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Chapter 2 1 CHAPTER 2 Futures Markets Refinements In this chapter, we explore the structure of futures markets and consider some current issues facing the futures markets. This chapter is organized into the following sections: 1. Margin Systems and Spreads 2. Exchange Competition 3. Contract Innovation and Contract Success 4. The Internationalization of Futures Markets 5. Future Market Players 6. Current Futures Industry Issues 7. Market Manipulation
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Chapter 2 2 Spreads Spread A spread occurs when a trader holds a combination of related futures positions. In this section, we explore two types of spreads: 1. Intra-market Spread A spread position with both futures positions on the same commodity. This reduces the risk of a spread relative to a single contract. Exchanges impose lower margin requirements on such spreads. 2. Inter-market Spread A spread in two distinct, but related, commodities. Exchanges determine which commodity pairs qualify for inter-market spread. Margin requirement are lower in qualifying inter-market spreads.
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Chapter 2 3 Margin Systems on Spreads Inter-Market Cross-Margining A margining systems that recognizes a spread between two distinct, but related commodities. This system establishes a trader's margin requirement by considering the trader's entire portfolio, even if parts of the portfolio are held in different exchanges. Standard Portfolio Analysis of Risk (SPAN) A partial cross-margining system that offers cross- margining between futures and options on futures by considering the entire portfolio in setting margin requirements.
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Chapter 2 4 Margin Systems & Spreads T a b l e 2 . 1 E x a m p le s o f I n t e r m a r k e t S p r e a d s Q u a l if y i n g f o r S p r e a d M a r g i n T r e a t m e n t Exchange Commodity Pair Chicago Board of Trade Treasury bonds vs. Treasury notes Any pair of wheat, corn, or oats Any pair of soybeans, soyoil, or soymeal Gold vs. silver Eurodollars vs. Treasury bills Any pair of foreign currencies (British pound, European Union Euro, Swiss franc, Japanese yen, Canadian dollar, Australian dollar) Any pair of cattle, feeder cattle, or hogs Chicago Mercantile Exchange Pork bellies vs. hogs
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Chapter 2 5 Margin Systems & Spreads Intra-Market Spread Trade A Commodity B Long Position Month 1 Exchange C Inter-Market Cross-Margin Broker B Commodity C Long Position Commodity D Short Position Exchange E Exchange F T R A D E R A Commodity B Short Position Month 3
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Chapter 2 6 Margin Systems and Spreads Benefits of the Cross-Margining System: 1. Lower initial margin. 2. Central clearinghouse to serve various markets. 3. Increase trading due to lower margins. 4. Helps US exchanges compete with foreign financial markets. 5. Reduces forced sell-offs by some traders during periods of dramatic price changes.
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