Ch05 - Chapter 5 Forwards and Futures Road Map Part A...

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Chapter 5 Forwards and Futures Road Map Part A Introduction to fnance. Part B Valuation o± assets, given discount rates. Fixed income securities. Common stocks. Forwards and ±utures. Options. Part C Determination o± discount rates. Part D Introduction to corporate fnance. Main issues Forwards and Futures Forward and Futures Prices Hedging Financial Risk Using Forwards/Futures
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5-2 Forwards and Futures Chapter 5 Contents 1 F o rw a rdC on t r a c t s ....................... 5 - 3 2 F u tu r e sC t r a c t 5 - 4 3 F o a rdandF u r e sP r i c e s .................. 5 - 7 3 . 1 C omm od i t i e s ............................ 5 - 8 3.2 Financials . . . . . . . . . . . . . ................. 5 - 1 1 4 H ed g in gw i thF o a rd sandF u r e s .............. 5 - 1 5 4 . 1 H e d g i n i t hF o a r d 5 - 1 5 4 . 2 H e d g i n i t u t u r e s........................ 5 - 1 6 4 . 3 B a s i sa n dB a s i sR i s k ........................ 5 - 2 0 4.4 Minimum Variance Hedge . . . . . ................. 5 - 2 2 5 H om ew o r k ........................... 5 - 2 4 15.407 Lecture Notes Fall 2003 c ° Jiang Wang
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Chapter 5 Forwards and Futures 5-3 1 Forward Contracts Defnition : A ±orward contract is a commitment to purchase at a ±uture date a given amount o± a commodity or an asset at a price agreed on today. - 0 T time agreement settlement The price fxed now ±or ±uture exchange is the ±orward price. The party with a “long position” will be the buyer o± the underlying asset or commodity. Features o± ±orward contracts: custom tailored traded over the counter (not on exchanges) no money changes hands until maturity non-trivial counter-party risk. Example. Consider a 3-month ±orward contract ±or 1,000 tons o± soybean at a ±orward price o± $165/ton. The long side is committed to buy 1,000 tons o± soybean ±rom the short side in three months at the price o± $165/ton. c ° Jiang Wang Fall 2003 15.407 Lecture Notes
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5-4 Forwards and Futures Chapter 5 2 Futures Contracts Forward contracts have two limitations: (a) illiquidity (b) counter-party risk. Futures contracts are designed to address these two limitations. Defnition : A ±utures contract is an exchange-traded, standard- ized, ±orward-like contract that is marked to the market daily. This contract can be used to establish a long (or short) position in the underlying asset. Features o± ±utures contracts: Standardized contracts: (1) underlying commodity or asset (2) quantity (3) maturity. Exchange traded Guaranteed by the clearing house — no counter-party risk Gains/losses settled daily Margin account required as collateral to cover losses. 15.407 Lecture Notes Fall 2003 c ° Jiang Wang
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Chapter 5 Forwards and Futures 5-5 A Forward Contract A Futures Contract c ° Jiang Wang Fall 2003 15.407 Lecture Notes
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5-6 Forwards and Futures Chapter 5 Example . Yesterday, you bought ten December live-cattle con- tracts at CME, at a price of $0.7455/lb. Contract size 40,000 lb. Agreed to buy 400,000 pounds of live cattle in December.
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Ch05 - Chapter 5 Forwards and Futures Road Map Part A...

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