3 trading futures

8/19/2019 3 Trading Futures

1/21

Comm 324 --- W. SuoSlide 1Slide 1

Futures


2/21


Objective

What are derivatives? Forwards, futures, options

How to trade them? How margin account works for futures


3/21


Alternative ways to buy a stock Process has three components

Fixing the price

Buyer making payment to the seller The seller transferring ownership of the share to the seller

Alternative ways Outright purchase

Fully leveraged purchase

Prepaid forward contract

Forward contract


4/21


The Nature of Derivatives

A derivative is an instrument whose value dependson the values of other more basic underlying

variables!ample

"ptions

Swaps

#orward $ontracts#utures $ontracts


5/21

Comm 324 --- W. SuoSlide %Slide %

Derivatives &ar'ets

!change Traded standard products trading floor or computer trading virtually no credit ris'

"ver(the($ounter

non(standard products telephone mar'et some credit ris'


6/21

Comm 324 --- W. SuoSlide )Slide )

#orward $ontracts

A forward contract is an agreement to buy or sell an assetat a certain time in the future for a certain price *thedelivery price+ ,t can be contrasted with a spot contract which is an agreement to

buy or sell immediately

The contract is an over(the(counter *"T$+ agreement between 2 companies

The delivery price is usually chosen so that the initial

value of the contract is -ero No money changes hands when contract is first

negotiated and it is settled at maturity


7/21Comm 324 --- W. SuoSlide .Slide .

The #orward /rice

The forward price for a contract is the delivery

price that would be applicable to the contract if

were negotiated today *i0e0 it is the delivery

price that would ma'e the contract worth

e!actly -ero+

The forward price may be different for contracts ofdifferent maturities


8/21Comm 324 --- W. SuoSlide Slide

!ample

"n August 2 2) a trader enters into anagreement to buy 1 million in three months at an

e!change rate of 10)15) This obligates the trader to pay 61)15) for 1

million on November 2 2)

7hat are the possible outcomes8


9/21Comm 324 --- W. SuoSlide 5Slide 5

/rofit from a

9ong #orward /osition/rofit

/rice of :nderlying

at &aturity S T

K



/rofit from a

Short #orward /osition/rofit

/rice of :nderlying

at &aturity S T

K



#utures ( similar to forward but feature formali-ed andstandardi-ed characteristics Agreement to buy or sell an asset for a certain price at a certain time

7hereas a forward contract is traded "T$ a futures contract istraded on an e!change

;ey difference in futures !change traded

Specifications need to be defined< 7hat can be delivered 7here it can be delivered 7hen it can be delivered

Settled daily

#utures



#utures price ( agreed(upon price at maturity

9ong position ( agree to purchase

Short position ( agree to sell

/rofits on positions at maturity

9ong = spot minus original futures price

Short = original futures price minus spot

;ey Terms for #utures

$ontracts



Agricultural commodities

&etals and minerals *including energy contracts+ #oreign currencies

#inancial futures

,nterest rate futures

Stoc' inde! futures

Types of $ontracts



!amples of #utures $ontracts

Agreement to<

buy 1 o-0 of gold > :S612%?o-0 inDecember *$"&@+

sell )2% > 10% :S6? in &arch

*$&+

sell 1 bbl0 of oil > :S611?bbl0 in April

*N&@+


15/21Comm 324 --- W. SuoSlide 1%Slide 1%

$learinghouse ( acts as a party to all buyers and sellers0 "bligated to deliver or supply delivery

Trading &echanics


16/21Comm 324 --- W. SuoSlide 1)Slide 1)

$losing out positions

Beversing the trade Ta'e or ma'e delivery

Delivery ( Actual commodity of a certain grade with a delivery

location or for some contracts cash settlement

&ost trades are reversed and do not involve actualdelivery

Trading &echanics C


17/21Comm 324 --- W. SuoSlide 1.Slide 1.

,nitial &argin ( funds deposited to provide capital

to absorb losses

&ar'ing to &ar'et ( each day the profits or lossesfrom the new futures price are reflected in the

account0

&aintenance or variation margin ( an established

value below which a traders margin may not fall0 &argin call ( when the maintenance margin is reached

bro'er will as' for additional margin funds

&argin and Trading

Arrangements



!ample of a #utures Trade

"n Eune % An investor ta'es a long position in 2

December gold futures contracts on $"&@

division of the New or' &ercantile !change*N&@+ contract si-e is 1 o-0

futures price is :S612% ?ounce

margin reFuirement is :S6)?contract *:S612 in total+ maintenance margin is :S64%?contract *:S65 in total+



;ey /oints About #utures

They are settled daily

$losing out a futures position involves entering into an

offsetting trade &ost contracts are closed out before maturity

,f a contract is not closed out before maturity it usually settled

by delivering the assets underlying the contract0

7hen there are alternatives about what is delivered where it isdelivered and when it is delivered the party with the short

position chooses0

A few contracts *for e!ample those on stoc' indices and

urodollars+ are settled in cash


21/21C 324 W SSlid 21

Convergence of Futures to Spot

Time

*a+

#utures

/rice

Spot /rice

Time

*b+

#utures

/rice

Spot /rice

3 trading futures

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