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topic03_pres - EC372 Bond and Derivatives Markets Futures...

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Unformatted text preview: EC372 Bond and Derivatives Markets Futures Markets II: Speculation and Hedging R. E. Bailey Department of Economics University of Essex University week 18 EC372 Bond and Derivatives Markets Futures Markets II Topic #3 Outline 1 Speculation 2 Hedging strategies Perfect (risk-free) hedging 3 Optimal hedging 4 Theories of futures prices Normal backwardation 5 Manipulation of futures markets Reading: Economics of Financial Markets , chapter 15 EC372 Bond and Derivatives Markets Futures Markets II Topic #3 Outline Speculation Speculation I Motive: to profit from expected changes in futures prices. I Hicks Value and Capital , p. 138: Futures prices are . . . nearly always made partly by speculators, who seek a profit by buying futures when the futures price is below the spot price they expect to rule on the corresponding date . . . 1 Speculators partly make prices hedgers matter too. 2 Implies that contracts will be held to maturity corresponding date when f ( T , T ) = p ( T ) 3 Only buying futures is mentioned but speculators may sell I Investor who expects price to rise: take a long position buy, planning to sell later at a higher price I Investor who expects price to fall: take a short position sell, planning to buy later at a lower price EC372 Bond and Derivatives Markets Futures Markets II Topic #3 Outline Speculation Speculation I Motive: to profit from expected changes in futures prices. I Hicks Value and Capital , p. 138: Futures prices are . . . nearly always made partly by speculators, who seek a profit by buying futures when the futures price is below the spot price they expect to rule on the corresponding date . . . 1 Speculators partly make prices hedgers matter too. 2 Implies that contracts will be held to maturity corresponding date when f ( T , T ) = p ( T ) 3 Only buying futures is mentioned but speculators may sell I Investor who expects price to rise: take a long position buy, planning to sell later at a higher price I Investor who expects price to fall: take a short position sell, planning to buy later at a lower price EC372 Bond and Derivatives Markets Futures Markets II Topic #3 Outline Speculation Speculation I Motive: to profit from expected changes in futures prices. I Hicks Value and Capital , p. 138: Futures prices are . . . nearly always made partly by speculators, who seek a profit by buying futures when the futures price is below the spot price they expect to rule on the corresponding date . . . 1 Speculators partly make prices hedgers matter too. 2 Implies that contracts will be held to maturity corresponding date when f ( T , T ) = p ( T ) 3 Only buying futures is mentioned but speculators may sell I Investor who expects price to rise: take a long position buy, planning to sell later at a higher price I Investor who expects price to fall: take a short position sell, planning to buy later at a lower price EC372 Bond and Derivatives Markets Futures Markets II Topic #3 Outline...
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This note was uploaded on 03/15/2012 for the course EC 372 taught by Professor R.e.bailey during the Spring '12 term at Uni. Essex.

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topic03_pres - EC372 Bond and Derivatives Markets Futures...

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