Chapter+2+Slides+Mechanics+of+Futures+and+Forward+Markets

Chapter+2+Slides+Mechanics+of+Futures+and+Forward+Markets -...

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Unformatted text preview: FIN 480 (Instructor- Saif Rahman) Derivative Securities Chapter 2 Mechanics of Futures and Mechanics of Futures and Forward Markets Forward Markets 1 FIN 480 (Instructor- Saif Rahman) Summary Summary 9 1.Specification of futures contracts. 9 2.Margin requirements for futures. 9 3.Mechanics of a futures trade. 9 4. Forwards Vs. Futures. 2 FIN 480 (Instructor- Saif Rahman) Futures Contracts Futures Contracts The Mechanics of Futures Contracts Futures contracts are a standardized exchange-traded contract in which the seller agrees to deliver a commodity to the buyer at some point in the future. Organized futures exchanges with standardized futures contracts: Reduce credit risk through: Clearing corporation being the counterparty in all transactions margin requirements (both initial and maintenance margins) and daily mark-to-market daily resettlement. Allow the contract features and volumes to be reported Allow the futures positions to be liquid (executing offsetting transaction to cancel the futures position) increasing the flexibility in their use. 3 FIN 480 (Instructor- Saif Rahman) Futures Contracts Futures Contracts Futures Contracts Markets The term of the contract is set by individual exchanges. Delivery months are March June September December Standardized underlying asset so that even if delivery rarely takes place, people know what they are getting. The exchange sets how much of the asset is traded in each contract. (ie. The notional amount) For financial futures, most exchanges follow the lead of the major markets in Chicago: Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME) 4 FIN 480 (Instructor- Saif Rahman) Futures contracts Futures contracts Types of Assets Available on a wide range of underlyings: financials: financials:stock indices, T.Bill,currency agricultural products:...
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Chapter+2+Slides+Mechanics+of+Futures+and+Forward+Markets -...

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