MGTC71-2 - MGTC71 - Lecture 2 Futures Markets Hedging...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
1 MGTC71 - Lecture 2 Futures Markets Hedging Strategies Using Futures Ata Mazaheri
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Lecture Outline Futures Contracts: Mechanics Futures Market: As a tool for Hedging
Background image of page 2
3 Futures Contracts Available on a wide range of underlyings Exchange traded Specifications need to be defined: What can be delivered, Where it can be delivered, & When it can be delivered Settled daily
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Margins A margin is cash or marketable securities deposited by an investor with his or her broker The balance in the margin account is adjusted to reflect daily settlement Margins minimize the possibility of a loss through a default on a contract
Background image of page 4
5 Example of a Futures Trade An investor takes a long position in 2 December gold futures contracts on June 5 contract size is 100 oz. futures price is US$900 margin requirement is US$2,000/contract (US$4,000 in total) maintenance margin is US$1,500/contract (US$3,000 in total)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 A Possible Outcome Daily Cumulative Margin Futures Gain Gain Account Margin Price (Loss) (Loss) Balance Call Day (US$) (US$) (US$) (US$) (US$) 900.00 4,000 5-Jun 897.00 (600) (600) 3,400 0 . . . . . . . . . . . . . . . . . . 13-Jun 893.30 (420) (1,340) 2,660 1,340 . . . . . . . . . . . . . . . . . 19-Jun 887.00 (1,140) (2,600) 2,740 1,260 . . . . . . . . . . . . . . . . . . 26-Jun 892.30 260 (1,540) 5,060 0 + = 4,000 + = 4,000
Background image of page 6
7 Other Key Points About Futures They are settled daily Closing out a futures position involves entering into an offsetting trade Most contracts are closed out before maturity If a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses. A few contracts (for example, those on stock indices and Eurodollars) are settled in cash
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Collateralization in OTC Markets It is becoming increasingly common for contracts to be collateralized in OTC markets Counterparties then post margin with each other to reflect changes in the value of the contract Regulators are now insisting that clearinghouses (similar to those used for futures) be used for some OTC contracts
Background image of page 8
9 Futures for Crude Oil on Aug 4, 2009 9
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/20/2011 for the course MGMT 71 taught by Professor Mazaheri during the Spring '11 term at University of Toronto- Toronto.

Page1 / 32

MGTC71-2 - MGTC71 - Lecture 2 Futures Markets Hedging...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online