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Lecture 10 Futures

The document provides an overview of futures contracts, highlighting their characteristics, trading mechanics, and types. It explains key terms such as long and short positions, as well as trading strategies like speculation and hedging. Additionally, it includes an example of EURO/USD futures to illustrate the concepts of profit/loss and margin requirements.

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Thùy Anh
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25 views19 pages

Lecture 10 Futures

The document provides an overview of futures contracts, highlighting their characteristics, trading mechanics, and types. It explains key terms such as long and short positions, as well as trading strategies like speculation and hedging. Additionally, it includes an example of EURO/USD futures to illustrate the concepts of profit/loss and margin requirements.

Uploaded by

Thùy Anh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FMT – IPM

Lecture 10: Futures (22)


Lecture outline
• Futures basic
• Examples of futures
• New development of derivatives
products in Vietnam
1 FUTURES
Futures contracts
• Forward - an agreement calling for a future delivery of an
asset at an agreed-upon price
• Futures - similar to forward but feature formalized and
standardized characteristics
• Key difference in futures and forwards
– Secondary trading - liquidity
– Margin requirements
– Marked to market
– Standardized contract units
– Clearinghouse warrants performance
– Settlement (by physical delivery or offset in the contract)
– Future prices.
Futures trade: Key terms

• Futures price - agreed-upon price at maturity


• Long position - agree to purchase
• Short position - agree to sell
• Profits on positions at maturity
• Long = spot minus original futures price
• Short = original futures price minus spot
Types of Contracts
• Agricultural commodities
• Metals and minerals (including energy contracts)
• Foreign currencies
• Financial futures
– Interest rate futures
– Stock index futures
• Weather
• Real estate

(self-study)
Trading Mechanics

• Clearinghouse - acts as a party to all buyers and sellers.


– Obligated to deliver or supply delivery
• Closing out positions
– Reversing the trade
– Take or make delivery
– Most trades are reversed and do not involve actual
delivery
Trading Mechanics
Trading Strategies

• Speculation
• long - believe price will rise
• short - believe price will fall
• Hedging
• long hedge - protecting against a rise in price
• short hedge - protecting against a fall in price
Example:
EURO/USD futures
• Underlying assets: Buying/Selling Euros
• Motivation: Hedging or speculating
• Contract size: € 125,000 (minimum 150
contracts)
• Exchange rate quote style: how many US$
is equivalent to €1.00
• Maturity date: Dec 2017 or Mar 2018
• Initial margin: 110% ($3905) (for
speculators) or 100% of MM (hedgers)
• Maintenance margin: US$3,550.
Example:
EURO/USD futures

• Futures price: 1.1567


• Assuming that you enter the long position today at
F= 1.1567.
– What is your expectation of the future spot rate?
– Tomorrow, if F changes to 1.1500. What is your profit or
loss on the account? Will you get a margin call?
Example:
EURO/USD futures
A person got in the long position in the trade for one contract.
• F (Day 0) = 1.1567
èContract value = 1.1567*€125,000 = USD144,587.50

A day later after the person went into the contract, market price of the
futures moved to 1.1500.
• F (Day +1) = 1.1500
è Contract value = 1.1500* €125,000 = US$143,750.00
– Loss on contract value: US$837.50 per contract
– The position could be closed on day +1 with a short position at
F=1.1500 è realised loss of $837.50.
– if the contract stay opens, the loss will be marked to market at the end
of the day.
Marked to market

Beg. Balance Profit/loss Ending Balance


US$3905 -$837.50 $3067.50 < $3550 (M.M)
è Margin call.
Profits: Futures Buyers
and Call Buyers Futures
Buyer
Profit Call Buyer

0
Fo

Price
Profits: Futures Sellers
and Put Buyers
Futures Seller
Profits

0
Fo
Put Buyer

Price
Profits: Futures Sellers
and Put Buyers
Basis and Basis Risk

• Basis - the difference between the futures price


and the spot price, FT – PT
• The convergence property says FT – PT= 0 at
maturity.
• Before maturity, FT may differ substantially from
the current spot price.
• Basis Risk - variability in the basis means that
gains and losses on the contract and the asset
may not perfectly offset if liquidated before
maturity.
Spot – Futures Parity

F0= S0 (1 + r – d)T

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