lecture2-07

lecture2-07 - Mechanics of Futures Markets Do they check...

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Lecture 1: Introduction 1 of 28 Mechanics of Futures Markets Do they check the breaks as well as do a tune up? Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 2 of 28 Futures Contracts Available on a wide range of underlying s www.cbot.com s www.nymex.com Exchange traded Specifications need to be defined: s What can be delivered, s Where it can be delivered, & s When it can be delivered Settled daily Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 3 of 28 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
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Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 4 of 28 Example of a Futures Trade An investor takes a long position in 4 April gold futures contracts on January 12 s contract size is 100 oz. s futures price is US$620.00 s margin requirement is US$2,700/contract (US$10,800 in total) s maintenance margin is US$2,000/contract (US$8,000 in total) Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 5 of 28 A Possible Outcome Daily Cumulative Margin Futures Gain Gain Account Margin Price (Loss) (Loss) Balance Call Day (US$) (US$) (US$) (US$) (US$) 620.00 10,800 11-Jan 625.00 2000 2000 12,800 0 . . . . . . . . . . . . . . . . . . 19-Jan 612.50 (5000) (3000) 7,800 3,000 . . . . . . . . . . . . . . . . . 21-Jan 605.40 (2,840) (5,840) 7,960 2,840 . . . . . . . . . . . . . . . . . . 26-Jan 617.30 4,760 (1080) 15,560 0 + = 10,800 8,000 + = 10,800 < Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 6 of 28 Other Key Points About Futures They are settled daily Closing out a futures position involves entering into an offsetting trade s (reversing the position) Most contracts are closed out before maturity
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Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 7 of 28 Collateralization in OTC Markets It is becoming increasingly common for contracts to be collateralized in OTC markets They are then similar to futures contracts in that they are settled regularly s (e.g. every day or every week) Dr. James S. Doran, Department of Finance, Florida State University garnet.acns.fsu.edu/~jsdoran Lecture 1: Introduction 8 of 28 Futures Prices for Gold: Prices Increase with Maturity 1.2 742.9 742.9 10-Dec 0.9 725.9 725.9 10-Jun 0.7 709 709 9-Dec 0.6 676.2 676.2 8-Dec 0.3 648.4 648.4 8-Feb 0.2 642.9 642.5 639.7 644.2 640.2 7-Dec 0.1 637.2 637.2 7-Oct Unch 631.4 631.4 7-Aug Unch 625.6 625.6 625.6 629.1 629.1 7-Jun Unch
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This note was uploaded on 12/14/2011 for the course FIN 5515 taught by Professor Staff during the Spring '10 term at FSU.

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lecture2-07 - Mechanics of Futures Markets Do they check...

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