PPT 2 - 2. FUTURES AND HEDGING Reading Luenberger, Chapter...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
9/28/2011 2. FUTURES AND HEDGING Reading Luenberger, Chapter 10.1 - 10.4, 10.6, 10.7, 10.9, 10.10 NOTE: Standard reference for future reading: Hull, J. C. (2011), Options, Futures and Other Derivatives , 8 th edition, Pearson/Prentice Hall. 2.1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2.0 Recap of Forwards • A forward contract has value and can be traded: • A forward contract is a contract between two parties. No money changes hand when it is written, at t=0 . • It also is worth zero (cannot do a quick arbitrage) at t=0 if it is priced fairly: 11/16/2010 2.2 F 0 = S 0 e rT
Background image of page 2
2.0 Recap of Forwards 10/1/11 2.3 S 0 : Spot price at t = 0. F 0 : Delivery price at t = T , agreed to at t = 0. F 0 = S 0 e rT , (no arbitrage, no carrying cost etc). S t : Spot price at t . F t : Forward contract written at t , for delivery at T . F t = S t e r ( T ! t ) F t ! F 0 , is potential profit, to be realized at T . f t = ( F t ! F 0 ) e ! r ( T ! t ) is the present value of that profit at t .
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2.1 Futures Markets § Forward contracts have advantages, e.g., flexibility in contracts that are direct agreements between two parties, and no cash exchange until maturity, but . § Forwards are typically traded over the counter (OTC) with - Low liquidity - Low transparency § Need similar contracts that are exchange traded, liquid and transparent, with main use for hedging to reduce risk 9/28/2011 Motivation 2.4
Background image of page 4
§ Available on many underlying assets – Commodities: lumber, corn, grain, sugar, metals, etc. – T-bonds and notes, currencies, stock indices § Exchange traded with standardized contracts – CME, CBOT, § Advantages: Liquidity and transparency § Settled daily! For further details on futures market mechanics, including delivery details, accounting and taxes, etc., see Hull (2011) 9/28/2011 2.5 Futures Contracts
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Terminology § Open interest : total number of contracts outstanding – equal to number of long positions or number of short positions § Settlement price : price just before the final bell each day – used for the daily settlement process § Volume : the number of trades in a day 9/28/2011 2.6
Background image of page 6
Summary: Forwards versus Futures Private contract between 2 parties Exchange traded Non-standard contract Standard contract Usually 1 specified delivery date Range of delivery dates Settled at maturity Settled daily Delivery or final cash settlement usually occurs Contract is usually closed out prior to maturity, by taking an offsetting position FORWARDS FUTURES 9/28/2011 2.7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 27

PPT 2 - 2. FUTURES AND HEDGING Reading Luenberger, Chapter...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online