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topic04_pres - EC372 Bond and Derivatives Markets Futures...

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Unformatted text preview: EC372 Bond and Derivatives Markets Futures Markets III: Applications R. E. Bailey Department of Economics University of Essex University week 19 EC372 Bond and Derivatives Markets Futures Markets III Topic #4 Outline 1 Weather futures 2 Financial futures contracts 3 Short-term interest rate futures A short-term interest rate hedge 4 Long-term interest rate (bond) futures 5 Stock index futures Hedging with stock index futures Reading: Economics of Financial Markets , chapter 16 EC372 Bond and Derivatives Markets Futures Markets III Topic #4 Outline Weather futures Weather futures I What does it mean to buy or sell future ‘Weather’? I For a futures contract, an ‘index’ of weather must be agreed upon. I On the CME the ‘degree day index’, DD , measures extreme temperature variations in a named city in a specified month I Investors trade contracts specified in terms of the DD index I The end of the month is the ‘delivery date’ – cash settlement then closes all remaining open contracts I Two indices: HDD (for winter) and CDD (for summer) I Example: I Today, the HDD index for December delivery in Boston is 800. I Suppose that one contract is purchased at 800 and the actual HDD index in December is observed to be 880 I The gain equals $1,600 (i.e. 80 points each worth $20). I Note: the position could have been offset (sold) before ‘delivery’ EC372 Bond and Derivatives Markets Futures Markets III Topic #4 Outline Weather futures Weather futures I What does it mean to buy or sell future ‘Weather’? I For a futures contract, an ‘index’ of weather must be agreed upon. I On the CME the ‘degree day index’, DD , measures extreme temperature variations in a named city in a specified month I Investors trade contracts specified in terms of the DD index I The end of the month is the ‘delivery date’ – cash settlement then closes all remaining open contracts I Two indices: HDD (for winter) and CDD (for summer) I Example: I Today, the HDD index for December delivery in Boston is 800. I Suppose that one contract is purchased at 800 and the actual HDD index in December is observed to be 880 I The gain equals $1,600 (i.e. 80 points each worth $20). I Note: the position could have been offset (sold) before ‘delivery’ EC372 Bond and Derivatives Markets Futures Markets III Topic #4 Outline Weather futures Weather futures I What does it mean to buy or sell future ‘Weather’? I For a futures contract, an ‘index’ of weather must be agreed upon. I On the CME the ‘ degree day index ’, DD , measures extreme temperature variations in a named city in a specified month I Investors trade contracts specified in terms of the DD index I The end of the month is the ‘delivery date’ – cash settlement then closes all remaining open contracts I Two indices: HDD (for winter) and CDD (for summer) I Example: I Today, the HDD index for December delivery in Boston is 800....
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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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topic04_pres - EC372 Bond and Derivatives Markets Futures...

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