vii: futures 23: financial futures. chapter 23: financial futures © oltheten & waspi 2012...

VII: Futures

23: Financial Futures

Chapter 23: Financial Futures © Oltheten & Waspi 2012

Derivative Securities

A derivative is a financial instrument whose underlying security is another financial instrument. Soybean Futures

The underlying security is soybeans. Soybeans are real so soybean futures are NOT Derivatives

T-Bond Futures The underlying security is a Treasury Bond (just

another piece of paper) so this is a derivative security.


Index Futures

Index Futures The underlying security is an Index. The index is an artificial construct

Dow Jones =13,096.36 (October 31,2012) S&P500 = 1,412.16

The number itself means

nothing


Index Futures

The deliverable is cash equal to a multiplier times the index on the delivery date.

The contract definition must include a money multiplier


DJIA Futures (CBOT)

$10 times index Settlement: third Friday of the contract

month Cash Settlement Contracts: March, June, September, &

December


S&P 500 Futures (CME)

$250 times index Settlement: third Friday of the contract

month Cash Settlement Contracts: March, June, September, &

December


DJIA ($10) Futures

http://www.cmegroup.com/trading/equity-index/us-index/dow.htmlAccessed October 29, 2011

Buy 10 Jun 12 @ 12030.0


Example: Buy DJIA Futures

Buy 10 Jun 12 @ 12030 Promise to buy at 10c * $10 * 12030 =

$1,203,000. DJIA currently at 12,231.11 Margin is $10,000 and $8,000 per contract


BUY 1 DOW JONES INDEX

@ 10797

$107,970

June 16, 06



@ 10797

$107,970

June 16, 06


@ 12030

$120,300

Jun 15, 12

BUY 10 DJIAs

@ 12030

$1,203,000

June 15, 2012

Chapter 23: Financial Futures


11,00011,20011,40011,60011,80012,00012,20012,40012,60012,80013,000

$(15,000)

$(10,000)

$(5,000)

$-

$5,000

$10,000

$15,000 PS = 12,231.11

PF = 12030

10.021,2$.030,1211.231,12*10$

*10 c

c

© Oltheten & Waspi 2012



@ 10797

$107,970

June 16, 06

Example: Sell DJIA Futures


@ 10797

$107,970

June 16, 06

SELL 1 DOW JONES INDEX

@ 12030

$120,300

Jun 15, 12

SELL 10 DJIAs

@ 12030

$1,203,000

June 15, 2012


Example: Sell DJIA Futures

11,00011,20011,40011,60011,80012,00012,20012,40012,60012,80013,000

$(15,000)

$(10,000)

$(5,000)

$-

$5,000

$10,000

$15,000

PS = 12,231.11PF = 12030

10.021,2$.030,1211.231,12*10$

*10 c

c



Hedging with Index Futures

Buying index futures gives you an investment with a beta of 1

Selling index futures gives you an investment with a beta of –1


Example: Short Hedge

Portfolio of $2,800,000 with a beta of 1.6 Sell DJIA contracts @ 11,200

200.8)-(1.6*11,200*$10

$2,800,000

Value per contract

Portfolio Value Portfolio Beta

Reduce Beta to 0.80

Number of Contracts


Hedging with Index Futures

AprilSet Hedge Portfolio of Equities $2,800,000.00

Sell 20 Dec @ 11,200[20 * $10 * 11,200 = $2,240,000]

-Margin

December

Lift Hedge Portfolio of Equities decreases by 16%

Buy 20 Dec @ 10,080[20 * $10 * 10,080 = $2,016,000]

Portfolio Value:

Rate of Return:

10%



Example: Short Hedge

Portfolio of $2,800,000 with a beta of 1.6 Sell DJIA contracts @ 11,200

400.0) - (1.6 *11200*$10

$2,800,000

Value per contract

Portfolio ValuePortfolio Beta

Reduce Beta to 0

Number of Contracts


Market declines 10%


Sell 40 Dec @ 11200[40 * $10 * 11,200 = $4,480,000]

-Margin

December 2006

Lift Hedge Portfolio of Equities decreases by 16%

Buy 40 Dec @ 10,080[40 * $10 * 10080 = $4,032,000]

Portfolio Value:

Rate of Return:



Market increases 10%


Sell 40 Dec @ 11200[40 * $10 * 11200 = $4,480,000]

-Margin

December

Lift Hedge Portfolio of Equities increases by 16%

Buy 40 Dec @ 12320[40 * $10 * 123200 = $4,928,000]

Portfolio Value:

Rate of Return:



Example: Short Hedge (40 contracts)

-$1,000,000

-$500,000

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

8960 9760 10560 11360 12160 12960

Unhedged Portfolio

Hedged Portfolio

Futures


Futures

Futures contracts can be defined around any independently verifiable outcome.


Class Average Futures

Contract $1000 * GPA

Initial Margin $4,000 Is a maintenance margin necessary?


Fin 300 Futures

Last semester Susan and John traded at 3.0

SELL Price per GPA: 3.0 Name: John Signature John Q

Investor

BUY Price per GPA: 3.0 Name: Susan Signature Susan

Speculator


Fin 300 Futures

Last semester Susan and John traded at 3.0

Margin: $4,000 Delivery Value: Profit/Loss: Equity:



Fin 300 Futures

End of semester GPA was 3.2





Current Quote: 3.20

Champaign Urbana Futures Exchange



Champaign Urbana Futures Exchange


Futures

Iowa Electronics Market Presidential Election Market http://tippie.uiowa.edu/iem/

http://iemweb.biz.uiowa.edu/graphs/graph_Pres08_WTA_flash.cfm


Republican Nomination 2012


Presidential Election 2012

Futures V

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