Futures contracts are exchange-traded contracts that specify the quality, quantity, and delivery details of an underlying asset. They are settled daily based on changes in the spot price. Margins are deposited to minimize the risk of default. Key features of futures include daily settlement, offsetting trades to close positions before maturity, and delivery or cash settlement at expiration unless closed out earlier. Basis risk arises from uncertainty about the relationship between futures and spot prices when hedges are closed out.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
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This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
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Derivatives - Basics of Derivatives contract covered in this pptSundar B N
Derivatives - Basics of Derivatives including forward, futures, swap and options contracts which covers HISTORY OF DERIVATIVES, CHARACTERISTICS OF DERIVATIVES , FEATURES OF DERIVATIVES, FUNCTIONS OF DERIVATIVES MARKET, USES OF DERIVATIVES, DIFFERENCE BETWEEN SHARES AND DERIVATIVES SHARES DERIVATIVES, DEFINITION OF UNDERLYING ASSET, DERIVATIVES ADVANTAGES AND DISADVANTAGES, PARTICIPANTS/ TRADERS IN DERIVATIVES MARKET, SPECULATORS, ARBITRAGEURS, HEDGER
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Derivatives - Basics of Derivatives contract covered in this pptSundar B N
Derivatives - Basics of Derivatives including forward, futures, swap and options contracts which covers HISTORY OF DERIVATIVES, CHARACTERISTICS OF DERIVATIVES , FEATURES OF DERIVATIVES, FUNCTIONS OF DERIVATIVES MARKET, USES OF DERIVATIVES, DIFFERENCE BETWEEN SHARES AND DERIVATIVES SHARES DERIVATIVES, DEFINITION OF UNDERLYING ASSET, DERIVATIVES ADVANTAGES AND DISADVANTAGES, PARTICIPANTS/ TRADERS IN DERIVATIVES MARKET, SPECULATORS, ARBITRAGEURS, HEDGER
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There are many of similarities between forex trading and Futures. First, they both use the same platforms, charts and pricing methods, authorize traders to guess the price movements of commodities, indices and currencies all from one account.
A future market or future exchange is a central financial exchange where people can trade. In which Futures contracts are an agreement between a buyer and a seller to buy or sell the underlying asset at a specified price and date in the future.
FUTURES MARKETS AND CENTRAL COUNTERPARTIES.pdfDPawanKumar
A Summary of Chapter 2 of the Book Options, Futures, and Other Derivatives by John Hull.
It Covers the below topics,
Specification Of A Futures Contract
Convergence Of Futures Price To Spot Price
The Operation Of Margin Accounts
OTC Markets
Market Quotes
Delivery
Types Of Traders And Orders
Regulation
Accounting And Tax
2. Futures Contracts
Available on a wide range of assets
Exchange traded
Specifications need to be defined:
What can be delivered,
Where it can be delivered, &
When it can be delivered
Settled daily
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3. Convergence of Futures to Spot (Figure
2.1, page 27)
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Time Time
(a) (b)
Futures
Price
Futures
Price
Spot Price
Spot Price
4. Margins
A margin is cash or marketable securities
deposited by an investor with his or her
broker
The balance in the margin account is
adjusted to reflect daily settlement
Margins minimize the possibility of a loss
through a default on a contract
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5. Some Terminology
Open interest: the total number of contracts
outstanding
equal to number of long positions or number of short
positions
Settlement price: the price just before the final
bell each day
used for the daily settlement process
Volume of trading: the number of trades in one
day
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6. Key Points About Futures
They are settled daily
Closing out a futures position involves
entering into an offsetting trade
Most contracts are closed out before
maturity
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7. Crude Oil Trading on May 26,
2010
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Open High Low Settle Change Volume Open Int
Jul 2010 70.06 71.70 69.21 71.51 2.76 6,315 388,902
Aug 2010 71.25 72.77 70.42 72.54 2.44 3,746 115,305
Dec 2010 74.00 75.34 73.17 75.23 2.19 5,055 196,033
Dec 2011 77.01 78.59 76.51 78.53 2.00 4,175 100,674
Dec 2012 78.50 80.21 78.50 80.18 1.86 1,258 70,126
8. Delivery
If a futures contract is not closed out before
maturity, it is usually settled by delivering the
assets underlying the contract. When there are
alternatives about what is delivered, where it is
delivered, and when it is delivered, the party
with the short position chooses.
A few contracts (for example, those on stock
indices and Eurodollars) are settled in cash
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10. Forward Contracts vs Futures Contracts (Table
2.3, page 41)
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Contract usually closed out
Private contract between 2 parties Exchange traded
Non-standard contract Standard contract
Usually 1 specified delivery date Range of delivery dates
Settled at end of contract Settled daily
Delivery or final cash
settlement usually occurs prior to maturity
FORWARDS FUTURES
Some credit risk Virtually no credit risk
11. Long & Short Hedges
A long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to lock in the price
A short futures hedge is appropriate
when you know you will sell an asset in
the future and want to lock in the price
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12. Basis Risk
Basis is usually defined as the spot
price minus the futures price
Basis risk arises because of the
uncertainty about the basis when
the hedge is closed out
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13. Choice of Contract
Choose a delivery month that is as close as
possible to, but later than, the end of the life
of the hedge
When there is no futures contract on the
asset being hedged, choose the contract
whose futures price is most highly correlated
with the asset price. This is known as cross
hedging.
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14. Stack and Roll (page 65-66)
We can roll futures contracts forward to
hedge future exposures
Initially we enter into futures contracts to
hedge exposures up to a time horizon
Just before maturity we close them out an
replace them with new contract reflect the
new exposure
etc
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