FUTURES - 4/12/11 Click to edit Master subtitle style...

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Unformatted text preview: 4/12/11 Click to edit Master subtitle style FUTURES 4/12/11 Forward Contract Basics Important: The price at which the trade will occur is also determined when the agreement is made This is an OTC Transaction.. This price is known as the forward price . One party faces default risk , because the other party might have an incentive to default on the contract. To cancel the contract, both parties must agree. One side might have to make a dollar payment to the other to get the other side to agree to cancel the contract. 4/12/11 Futures Contract Basics A Futures contract is an agreement made today between a buyer and a seller who are obligated to complete a transaction at a date in the future. The buyer and the seller do not know each other. The "negotiation" occurs on an electronic trading platform or in the fast-paced frenzy of a futures pit. The terms of a futures contract are standardized . What to trade; Where to trade; When to trade; How much to trade; what quality of good to tradeall standardized under the terms of the futures contract. These are called the Contract Specifications. 4/12/11 Futures Contract Basics, II. The price at which the trade will occur is determined "in the pit or, increasingly, in the electronic market. This price is known as the futures price . No one faces default risk, even if the other party has an incentive to default on the contract. The Futures Exchange where the contract is traded guarantees each tradeno default is possible. To cancel the contract, an offsetting trade is made, either in the pit or in the electronic market. The trader of a futures contract may experience a gain or a loss. 4/12/11 Organized Futures Exchanges Established in 1848, the Chicago Board of Trade (CBOT) was the first organized futures exchange in the United States. Other Major Exchanges include: New York Mercantile Exchange (1872) Chicago Mercantile Exchange (1874) Early in their history, these exchanges only traded contracts in storable agricultural commodities (i.e., soybeans, corn, wheat). Agricultural futures contracts are still important to organized futures exchanges. During 2007, there were several important events for organized futures exchanges. The IntercontinetalExchange (ICE) purchased the New York Board of Trade (NYBOT) The Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) merged and are now The CME Group, Inc. 4/12/11 Financial Futures Financial futures are also important to organized futures exchanges. Some important milestones: Currency futures trading, 1972....
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This note was uploaded on 04/11/2011 for the course FIN 321 taught by Professor Blose during the Winter '07 term at Grand Valley State University.

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FUTURES - 4/12/11 Click to edit Master subtitle style...

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