Futures_Lecture1

Futures_Lecture1 - MAN308FuturesandRelatedContracts 1....

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MAN308 Futures and Related Contracts 1. `History 1.1. Aristotle described the story of Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application". Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or poor and because the olive press owners were willing to hedge against the possibility of a poor yield. When the harvest time came, and many presses were wanted concurrently and suddenly, he let them out at any rate he pleased, and made a large quantity of money. 1.2. The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s, to meet the needs of samurai who – being paid in rice and after a series of bad harvests – needed a stable conversion to coin. 1.3. Research Question: Roman soldiers were paid in salt ( sal in Latin, from which we get the word salary ). Was there a futures exchange during the Roman Empire? 1.4. Recent History 2. Definition of futures contract Following Björk [7] we give a definition of a futures contract . We describe a futures contract with delivery of item J at the time T: There exists in the market a quoted price F(t,T) , which is known as the futures price at time t for delivery of J at time T. At time T , the holder pays F(T,T) and is entitled to receive J. During any time interval ( s , t ], the holder receives the amount F ( t , T ) − F ( s , T ). The spot price of obtaining the futures contract is equal to zero, for all time t such that t < T . 1
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MAN308 Futures and Related Contracts 3. Terminology of Processes In finance , a futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price ). The contracts are traded on a futures exchange . Futures contracts are not "direct" securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract . The key definition of futures relationships is as follows: The party agreeing to buy the underlying asset in the future assumes a long position , and the party agreeing to sell the asset in the future assumes a short position . Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying asset or instrument. This could be anything from a barrel of crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement.
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This note was uploaded on 06/11/2011 for the course MAN 1000 taught by Professor Prof.fisher during the Spring '11 term at Western Cape.

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Futures_Lecture1 - MAN308FuturesandRelatedContracts 1....

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