Futures I

Futures I - Econ 174 – FINANCIAL RISK MANAGEMENT LECTURE...

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Unformatted text preview: Econ 174 – FINANCIAL RISK MANAGEMENT LECTURE NOTES Foster, UCSD October 16, 2011 FUTURES I -- MARKETS & TRADING A. Contract Characteristics Notation (for 0 ≤ t ≤ T and a given asset) Symbol Definition t = 0…τ… T Date position opened, date closed, date of delivery S t Spot price at time t F t (T) Futures price at time t for contracts specifying delivery on date T F (T) or F “Original” futures price locked in when position opened at time t = F τ (T) or F τ Futures price when position closed (reversed) at time τ < T 1. Comparison of Forwards and Futures Contracts: a) Forward and futures contracts are agreements to buy (accept) or sell (deliver) a given quantity of asset at a specific price (F ) and specific future delivery date T. 1) The buyer holds a long position (“buys contract”) 2) The seller holds a short position (“sells contract”) 3) Principal asset categories: • Agricultural commodities • Metals and minerals (including petroleum and energy sources) • Foreign currency futures and exchange rates • Financial futures (stock indexes, fixed-income securities and interest rates) b) Forward contracts. 1) Private contracts between 2 parties, tailored to buyer-seller needs, traded OTC. 2) No payments or gain/loss until settlement at time of delivery. 3) Delivery is on one specified date. 4) Delivery usually takes place. 5) Some credit or default risk without collateralization. c) Futures contracts. 1) Standardized contracts traded on organized exchanges. 2) Margin requirements and “marking to market” imply that gain/loss is settled daily. 3) Delivery is a period (often the entire delivery month). 4) Contracts usually closed out before delivery period, so delivery rarely occurs. 5) Virtually zero default risk. 2. Features of Futures Contracts: a) Futures contract newspaper listings. 1) Commodity, exchange, units per contract, pricing per unit. Ec 174 FUTURES I p. 2 of 12 2) Settlement price (at or near the close of previous day’s trading). 3) Open interest – number of outstanding contracts (long positions). Table 1. FUTURES PRICES ( WSJ 1/7/2008) O PEN I NTEREST O PEN H IGH L OW S ETTLE C HG Metal & Petroleum Futures Gold (CMX) – 100 troy oz.; $ per troy oz. Jan Feb April 860.9 862.8 871.7 860.9 867.8 874.1 857.4 857.8 865.0 859.6 862.0 868.8-3.50-3.70-3.70 71 291,20 9 74,688 Agricultural Futures Corn (CBT) – 5,000 bu.; cents per bu. Marc h Dec 466.0 485.2 5 468.5 488.2 5 462.0 482.5 466.2 5 485.7 5-.50-1.00 595,99 3 292,32 3 Cattle-Live – 40,000 lbs.; cents per lb. Feb April 94.50 96.95 94.95 97.45 94.40 96.95 94.60 97.35 .050 .400 112,33 9 72,196 Interest Rate Futures Treasury Bonds (CBT)-- $100,000; pts 32nds of 100% Marc h June 117- 29 117- 08 118- 16 117- 25 117- 18 116- 30 118- 13 117- 25 10 9 985,81 3 2,723 Currency Futures British Pound (CME)-- £62,500; $ per £ Marc h June 1.969 1 1.963 3 1.971 7 1.964 3 1.961 1 1.955 1 1.965 5 1.959-.003 1-.003 2 82,125 331 Index Futures DJ Industrial Average (CBT)...
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This note was uploaded on 10/16/2011 for the course ECON 174 taught by Professor Foster,c during the Fall '08 term at UCSD.

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Futures I - Econ 174 – FINANCIAL RISK MANAGEMENT LECTURE...

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