FIN4520-Chapter2

FIN4520-Chapter2 - Mechanics of Futures Markets Chapter 2 1...

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Mechanics of Futures Markets Chapter 2 1
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Futures Contracts An agreement between a buyer and a seller to buy or sell something at a future date for a specified price. Profits and losses are computed on a daily basis. Available on a wide range of underlyings Exchange traded, approved by CFTC Specifications need to be defined Settled daily 2
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Contract Specifications 1. Quantity or contract size 2. Quality 3. Expiration months 4. Delivery terms 5. Delivery dates 6. Minimum price fluctuations 7. Daily price limits 8. Trading days and hours 9. Position limits 3
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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 Three types of margin Initial – required deposit when position entered Maintenance – amount that must be maintained Variation – margin required to return to initial margin after a margin call 4
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FIN4520-Chapter2 - Mechanics of Futures Markets Chapter 2 1...

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