Lecture+19+Nov+21+2011

Lecture+19+Nov+21+2011 - FINA3104 Lecture19 FuturesMarkets...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 19 – Futures Markets Darwin Choi November 21, 2011 Recap from Last Lecture Duration and Convexity A Better Approximation How to Manage Interest Rate Risk? Match Duration to Holding Period Match Asset & Liability Duration 2
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Outline of Today’s Lecture Motivating Futures Contracts Forward & Futures Contracts Types of Assets Traded Payoffs on Futures Contracts Mechanics of Futures Trading 3 Financial Instruments Marketable “Securities” Derivative Securities Claims on Claims Primitive Securities Claims on Real Assets Debt Bills, Notes, Bonds Equity Stocks Futures Options Non-Marketable Debt Loans, Mortgages Insurance Policies Equity Net Worth Securitized Claims 4
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Futures Contracts (“Futures”) Long position: Obligates the holder to buy something at a preset price (futures price) on a certain date (contract maturity) Short position: Obligates the holder to sell something at a preset price (futures price) on a certain date (contract maturity) Futures Contracts & Hedging It takes a petroleum refiner 3 months to process crude oil into refined products (gasoline & heating oil). Suppose she buys crude at the spot price in June and sells the refined products in September. What is the realized profit per barrel? 6
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Spot & Futures Prices Prices in June 2009 for delivery in September Prices for immediate delivery (in June and September) Spot Prices (per barrel) Year Month Products Crude Oil 2009 June 65.16 61.46 2009 September 65.26 61.18 Three Month Futures Prices (per barrel) Month Products Crude Oil 2009 June 69.73 65.27 7 Spot Prices (per barrel) Month Products Crude Oil Profit 2009 June 61.46 2009 September 65.26 3.80 Futures Contracts & Hedging Hedging Strategy: Sell a 3 month Futures Contract in June to Lock in the September Selling Price: No Hedging: Three Month Futures Prices (per barrel) Month Products Crude Oil Profit 2009 June 69.73 8.27 (not known till Sept) (known in June) 8
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Futures Contracts & Speculating Suppose you believe the price of crude oil in September will be lower than the June futures price.
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Fall '11 term at HKUST.

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Lecture+19+Nov+21+2011 - FINA3104 Lecture19 FuturesMarkets...

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