Вы находитесь на странице: 1из 4

1

2013, Study Session # 17, Reading # 62

“FUTURES MARKETS AND CONTRACTS”


62.a,b Futures Vs Forwards

Similarities Differences

 Deliverable / cash settlement.  Exchange traded.


 Priced to have zero value at inception.  Highly standardized.
 Clearinghouse, the only counterparty.
 Government regulated market (future).

Characteristics of Futures Markets

Standardization Clearinghouse

 Specify quality & quantity of goods.  Act as a buyer to every seller & seller to
 Delivery time & manner. every buyer.
 Standardization promotes liquidity.  Buyers/sellers know they can reverse
 Speculators ⇒ gain exposure through their position at a future date.
futures contracts.  Counterparty ⇒ clearinghouse
 Hedgers ⇒ reduce exposure through historically never defaulted in U.S.
futures contracts.

62.c  Margin = percentage of market value of asset.


 50% may be borrowed, remaining paid in equity account in cash.
 Interest is charged on borrowed amount.
 Margin percentage owned varies ⇒ must be maintained at some minimum percentage.

Margin in Futures

 Margin is a performance guarantee.


 Paid by both long & short.
 No interest as no loan is involved.
 Traders are required to manage margin balance above the level represented by
maintenance margin requirement.
 Trader deposit funds to broker who post to clearinghouse.
 Initial margin & maintenance requirements are set by clearinghouse.
 Margin is typically  as compared to value of assets ⇒  leverage is involved.

Margin in Securities Market

 Cash deposited ⇒ paid to security seller.


 Balance provided by broker (unpaid).
 Unpaid balance is loan ⇒ interest is charged.
 Margin requirements are set by Fed.

Copyright © FinQuiz.com. All rights reserved.


2
2013, Study Session # 17, Reading # 62

62.c Initial Margin

 Must be deposited in futures account.


 Set for each type of asset.
 Based upon one day’s maximum price fluctuation ⇒relatively low.

Maintenance Margin

 Minimum margin that must be maintained.


 If margin balance < maintenance margin ⇒ must be brought back
to initial margin.

Variation Margin

 Funds used to bring account back to initial margin.


 If exceeds the initial margin, can funds be
(i) Withdrawn
(ii) Used to take another position.

Settlement Price

 Avg. of prices of trades during the final few trades of the day.
 Last period of trade (closing period) is set by the exchange.
 Used to calculate margin requirements at each day end.

How a Futures Trade Takes Place

 Futures exchange selects the contracts to trade.


 Contract price depends on parties involved.
 Supply (short), demand (long) mechanism used to determine
price is called “pit” ⇒ happens at exchange floor.
 Equilibrium price is known to all traders.

62.d Price Limit

 Exchanges impose limits on the price changes that can occur


from one day to the next.
 New equilibrium price must be in b/w price limit.
 Limit up: trade proposed > upper price limit.
 Limit down: trade proposed < lower price limit.
 Limit up & limit down ⇒ collectively called limit move.
 If trade can’t take place due to limit move ⇒ locked limit.

Marking to Market

 Process of adjusting futures account balance.


 ∆ in value of underlying asset based on new settlement price is
used.
 Under extraordinary circumstances marking to market can be
done on an intra-day basis otherwise it is done on daily basis.

Copyright © FinQuiz.com. All rights reserved.


3
2013, Study Session # 17, Reading # 62

62.e Ways to Terminate a Futures Contract

1). Delivery 2). Cash Settlement

 Short delivers the underlying to terminate the  Futures contract marked to market on last
contract. trading day.
 Long pays contract price.  Delivery is not an option.
 Terms of delivery are specified in the contract.
 Represent less than 1 % of all contract terminations.

3). Reverse / Offsetting Position 4). Exchange for Physical

 Clearinghouse will net the position if exactly  ‘Ex-pit’ (off the floor) transaction.
opposite trade position is taken.  Sole exception to federal law.
 Exact in terms of  Two parties (not clearinghouse) negotiate to
a) Maturity deliver asset.
b) Quantity  Parties are with opposite positions.
c) Good  Actual exchange is done but contract does not
 Most futures position settled this way. close in exchange.
 Difference in price, if any, is adjusted against the  Differ from regular delivery (method 1).
margin deposited in the account.

Delivery Options in Futures Contracts

 Options granted to the short.


 Treasury bonds may offer choice of bonds.
 Physical asset: short may be given a choice of where to deliver.
 Such options are valuable to short.

62.f T-Bill Futures

 Quoted on discount basis (100 – discount % on T-bills).


 Cash settled.
 Based on 90 days, $ 1 million face value.
 Price is influenced by Fed.
 Lost importance against Eurodollar futures which
provide global measure of interest rates.
 Price ∆ of 0.01% represents $25 ∆ in value.

Euro-dollar Futures

 Based on 90 day LIBOR & add on yield.


 Cash settled.
 Price quoted as T-Bills (100 – annualized LIBOR in %).
 Price change of 0.01% represents $25 ∆ in value.

Treasury bond Futures

 Underlying bonds in contracts have maturities > 15 years.


 Deliverable contract.
 Face value of $100,000.
 Quoted as percent & fraction of 1% of face value.
 Short can deliver any of several bonds matching the contract terms.
 Conversion factor adjusts long’s payment at expiration.
 Bond has  value ⇒ conversion factor.
 Bond has  value ⇒ conversion factor.
 At expiration long pays ⇒ price × conversion factor.

Copyright © FinQuiz.com. All rights reserved.


4
2013, Study Session # 17, Reading # 62

62.f Stock Index Futures

 Settled in cash.
 Based upon some multiplier.
 Value of contract = multiplier × index level.
 If index > (<) previous settlement ⇒ long receives (pays) multiplier × ∆ in index.

Currency Futures

 Contract set in foreign currency units (standardized).


 Currency futures market is smaller in volume than currency forward
market.
 Delivery settled.

Copyright © FinQuiz.com. All rights reserved.

Вам также может понравиться