Exchanges futures chicagoboardoftradecbtbeganin1848

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Unformatted text preview: ce Options versus Futures Contracts Contracts Options Right to buy Strike price specified in option contract Loss limited to price paid for option Futures Obligation to buy Delivery price set by supply and demand No limit on potential loss Futures Exchanges Futures Chicago Board of Trade (CBT) began in 1848 More than a dozen U.S. commodities exchanges – Chicago Mercantile Exchange (CME) is largest – Chicago Board of Trade and New York Mercantile also active – 95% of U.S. commodities trade on these three exchanges Most U.S. exchanges use “open cry auction” European exchanges are rapidly growing and using more electronic technology Figure 15.1 “Open Cry Auction” Figure http://www.oxfordfutures.com/docs/Handsignals.pdf Players in the Futures Markets Players Hedgers Producers and processors Protecting their interests in underlying commodity or financial instrument – Provide the actual products being sold – – Speculators – Investors – Trying to earn profit on expected swings in prices of futures contracts – Provide liquidity Trading Mechanics Trading Contracts are easily traded on futures markets Bought and sold through brokerage offices Same types of orders are used as stocks – Market – Limit Long position—buying a contract – Investor wants contract price to go up Short position—selling a contract – Investor wants contract price to go down Long and short positions can be liquidated by executing an offsetting transaction – About 1% of futures contracts are settled by delivery Margin Trading Margin All futures contracts are traded on margin No borrowing is required Initial margin deposit – Amount deposited with broker at time of commodity transaction to cover any loss in market value of futures contract due to price movements – Margin requirements range from 2% to 10% Maintenance deposit – – Minimum amount of deposit required at all times Margin call occurs if value drops below allowed amount Mark­to­the­market occurs daily Table 15.2 Margin Requirements for Table a Sample of Commodities and Financial Futures Financial Table 15.3 Table Major Classes of Commodities Major Components of Commodity Contract Contract Type of product Exchange where contract is traded Size of contract (in bushels, pounds, tons) Method of valuing contract (e.g., cents per pound, dollars per ton) Delivery month Open Interest: the number of contracts currently outstanding on a commodity or financial future Factors in...
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