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Toosmall tradingwillbecomeexpensivesincethereisa

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Unformatted text preview: le within 15 years. T­ Notes must have a maturity of no less than 6.5 years. Contract Size Contract Size Specifies the amount of the asset delivered under 1 contract. Too large ­ Hedgers or speculators who wish to hedge small exposures or take small speculative positions will be unable to use the contracts. Too small – Trading will become expensive since there is a cost associated with each contract traded. Delivery Locations Delivery Locations Place of delivery must be specified by exchange, particularly important for commodities where there may be significant transportation costs. – Eg. Lumber futures contract “Each unit is individually paper­wrapped and loaded in double­door boxcars and delivered to the province of British Columbia. Adjustments in prices will be made for alternative locations of delivery. Delivery Months Delivery Months A futures contract is referred to by its delivery month, which must be specified by the exchange to meet the needs of the market participants. – Eg. Corn futures have delivery months in March, May, July, September, December Price Quotes Price Quotes Futures prices are quoted in a way that is convenient and easy to understand. Eg. Crude oil futures is quoted in dollars per barrel to 2 decimal places. Minimum price movement = $0.01 (1 cent per barrel) Daily Price Movement Limits Daily Price Movement Limits Price Limits are Specified by the exchange to prevent large price movements due to speculation. A “Limit Move” is a price move in either direction equal to the daily price limit. – If price moves down by an amount equal to the daily price limit, the contract is “Limit Down”. – If price moves up by the limit, the contract is “Limit Up”. Trading will cease once the contract is Limit Up or Limit Down. Position Limits Position Limits The maximum number of contracts that a speculator may hold. To prevent speculators from exercising undue influence on the market. Margins Margins To minimise contract defaults, to ensure both sides will honour the contract. Marking to Market – At the end of each trading day, the margin account is marked to market, ie. adjusted to reflect the investors’ gains or losses. Margin Account Initial Margin Maintenance Margin Margins Margins ­ Example 1 An investor buys 2 (100 ounce) December 1993 Gold futures contracts. Curren...
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