4504c18 - Futures Market Chapter 18 Understanding Futures...

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Futures Market Chapter 18 Understanding Futures Markets o Spot or cash market Price refers to item available for immediate delivery Spot price = today's price o Forward market Forward contracts are centuries old, traceable to at least the ancient Romans and Greeks Any asset can be traded for future delivery between two parties on whatever terms are agreeable to them through a forward contract. Price refers to item available for delayed delivery When the forward contract has: 1) Standardized amounts 2) A carefully defined asset 3) Deliverable on a specified date at a specified location 4) Subject to terms and conditions established by organized market On which it is traded, then the contract is a futures contract Future markets standardizes the no standardized forward contracts o Futures market Organized future markets go back to the mid-nineteenth century in Chicago A future contract is an agreement that you will accept (or make) delivery of a particular asset (either real or financial) on some date in the future at a price determined today. Sets features (contract size, delivery date, and conditions of the item) for delivery Only price and the number of contracts are negotiated Long position-buyer Short position-seller Marked to market -- daily settlement of any gains or losses on the future contracts are made. Future markets provide a secondary market for trading of contracts before maturity . How is the Future Market Different from the Stock Market? Losses must be covered, gains credited Margin is usually quite small 3-10% Margin is only a good faith deposit Ownership is not transferred until delivery
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o Futures market characteristics Centralized marketplace allows investors to trade with each other Performance is guaranteed by a clearinghouse Valuable economic functions Hedgers shift price risk to speculators If expect prices to rise hedge by buying a futures contract - If prices rise to more than the future price, you experience a gain. If expect prices to fall hedge by selling a futures contract - If prices fall to more than the future price, you experience a gain . Price discovery conveys information Types of Futures 1) Commodities-agricultural, metals, and energy related 2) Foreign Exchange 3) Precious Metal 4) Financial Stock Indexes SP 500 SP Midcap 400 NYSE Composite Major Market Russell 2000 Nikkei 225, etc Foreign Currencies Japanese Yen German Mark Canadian Dollar British Pound Swiss Franc Austrian Dollar U.S. Dollar, etc. Interest. Rate Futures GNMA Pass Through T-bills T-bonds T-notes Commercial Paper Large CD's German Govt Bonds Italian Govt Bonds, etc . Example of Treasury Bond Future
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This note was uploaded on 07/09/2011 for the course FIN 4504 taught by Professor Banko during the Summer '08 term at University of Florida.

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4504c18 - Futures Market Chapter 18 Understanding Futures...

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