chapter20 - Chapter 20: Futures CHAPTER OVERVIEW Chapter 20...

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Unformatted text preview: Chapter 20: Futures CHAPTER OVERVIEW Chapter 20 is designed to cover the basics of futures markets in general but with primary emphasis on financial futures. While the basics are applicable to any commodity, and money can be thought of as another commodity, it is felt that students will receive the most benefit from concentrating on financial futures after a general introduction to the subject, which is one of the more difficult subjects for beginners. The first part of the chapter develops the idea of a forward market and a futures market, outlines current U. S. futures markets, and describes the structure of futures markets. This provides the student with the necessary background information. The chapter next focuses on the mechanics of trading, including all of the basics. Margin, which is completely different from that involving stocks, is developed in detail, including an example. The chapter discusses the use of futures contracts by explaining the role of hedgers and speculators. This includes a description of basis. The subsequent discussion is organized by examining how to both hedge and speculate in both interest rate futures and stock index futures. The necessary background information is provided, along with examples of how to use the contracts, with particular emphasis on short hedges. The limitations of hedging are considered. Speculating with both interest-rate futures and stock-index futures is discussed. The chapter concludes with a discussion of program trading, which is often cited in the popular press. CHAPTER OBJECTIVES 1. To explain the basics of futures markets in general. 2. To explain financial futures in particular--what is available, how they are used, what they can accomplish. 3. To illustrate various hedging and speculating strategies using both interest rate options and stock index options. 20-1 MAJOR CHAPTER HEADINGS [Contents] Understanding Futures Markets ! Why Futures Markets? [reasons for forward markets and futures markets] ! Current U. S. Futures Markets [futures markets as classified in The Wall Street Journal ] ! Foreign Futures Markets [brief description of futures markets in other countries] ! Futures Contracts [basic characteristics] The Structure Of Futures Markets ! Futures Exchanges [members of the exchanges] ! The Clearinghouse [the role of the clearinghouse] The Mechanics of Trading ! Basic Procedures [short position vs. long position; offset; price fluctuations; commissions] ! Margin [good faith deposit; margin call; how accounts are marked to the market, including example] Using Futures Contracts [traditional uses] ! Hedgers [trying to offset the risk in a cash position] ! How to Hedge With Futures [basic idea; short hedge; long hedge] ! Speculators [trying to profit by their actions] Financial Futures [reasons for; differences between these and commodity futures] ! Interest Rate Futures [what contracts are available; reading quotes; hedging and speculating with interest rate futures, with examples]...
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This note was uploaded on 10/10/2011 for the course FINANCE fin4423 taught by Professor Csk during the Fall '11 term at Troy.

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chapter20 - Chapter 20: Futures CHAPTER OVERVIEW Chapter 20...

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