Lecture_20 - Lecture20 FuturesandForwards RuslanGoyenko...

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FINE441 –Investment Management 1 Lecture 20 Futures and Forwards Ruslan Goyenko Faculty of Management McGill University
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Forwards versus Futures Forwards Futures Private contract between two parties Traded on an exchange Not standardized Standardized contract Specified delivery date (usually) Range of delivery dates Settled at end of contract Settled daily Delivery or final cash settlement usually takes place Contract usually closed out prior to maturity 2
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Futures Contracts 3 A futures contract calls for delivery of a  commodity at a specified delivery or maturity  date, for an agreed-upon price, called the  futures price , to be paid on contract maturity.  The trader taking the  long position  commits to  purchasing the commodity on delivery date.  The trader taking the  short position  commits to  delivering the commodity at contract maturity. 
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Futures Contracts 4 The trader in the long position is  said to “buy” a contract; the  short-side trader “sells” a  contract.  At maturity: Profit to long = Spot price at maturity – Original futures  price Profit to short = Original futures price - Spot price at  maturity The spot price is the actual market price of the 
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Payoffs From Futures Contracts 5 Asset price at maturity Payoff 0 K K: Delivery price LONG POSITION
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Payoffs From Futures Contracts 6 Asset price at maturity Payoff 0 K K: Delivery price SHORT POSITION
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