2Forwards and Futures

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Futures Contracts

Available on a wide range of underlyings

Commodity Financial assets

Contract size

Specifies the amount of the asset to be delivered for one contract

Price quotes

Crude oil futures - $0.01 per barrel Treasury y bond futures – thirty-seconds y of a dollar

Price limits Position limits
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30 Fut tures Price ($ per barrel) 29 28 27 26 25 24 Contract Maturity Month
Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05
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Delivery


Short a futures contract Buy the asset M k d Make delivery li
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Example
Futures Price S Spot P Price i Futures Price
Spot Price
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Futures Prices for Gold on Feb 4, 2004: Prices Increase with Maturity
(a) Gold 408 407 406 405 404 403 402 401 Contract Maturity Month 400 399 398 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04

Daily settlement
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AP Possible ibl Outcome O t
Daily Futures Price Day (US$) 400 00 400.00 5-Jun . . . 13-Jun . . . 19-Jun . . . 26-Jun 397.00 . . . 393.30 . . . 387.00 . . . 392.30 (600) . . . (420) . . . (1,140) . . . 260 (600) . . . (1,340) . . . (2,600) . . . (1,540) Gain (Loss) (US$) Cumulative Gain (Loss) (US$) Margin Account Balance (US$) 4 000 4,000 3,400 . . . 2,660 . . . 2,740 . . . 5,060 + 0 . . . 1,340 . . + 1,260 . . . 0 = < = 4,000 3,000 4,000 Margin Call (US$)


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Example of a Futures Trade

An investor takes a long position in 2 December gold futures contracts on June 5

contract size is 100 oz futures price is US$400 initial margin requirement is US$2,000/contract (US$4,000 in total) maintenance margin is US$1,500/contract (US$3,000 in total)

Exchange traded Specifications need to be defined:

What can be delivered Where it can be delivered When it can be delivered
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Time (a) (b)
Time
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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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Convergence g of Futures Price to Spot p Price

Suppose that the futures price is above the spot price during the delivery period Traders have an arbitrage opportunity


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Newspaper Quotes
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Some Terminology

Open interest

the total number of contracts outstanding equal to number of long positions or number of short positions One trading day older than the price information
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2 Forwards and Futures
Fangyi Jin
Chinese Academy of Finance and Development Central University of Finance and Economics fangyi jin@cufe edu cn fangyi.jin@cufe.edu.cn

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Regulation 来自百度文库f Futures

Regulation is designed to protect the public interest Regulators try to prevent questionable trading practices by either individuals on the floor of the exchange or outside groups

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Collateralization in OTC Markets

Credit risk has been a feature of the OTC markets. It is becoming increasingly common for contracts to be collateralized in OTC markets They are then similar to futures contracts in that they are settled regularly (e (e.g. g every day or every week) Collateral is required to pay the change of contract value.
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Accounting & Tax

Ideally hedging profits (losses) should be recognized at the same time as the losses (profits) on the item being hedged Ideally profits and losses from speculation should be recognized on a mark-to-market basis Taxable gain or loss and the timing of recognition of the gain or loss. Roughly speaking, this is what the accounting and tax treatment of futures in the U.S. and many other countries attempts to achieve
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Further Details

They are settled daily (marking to market) Investors earn interest on the balance Closing out a futures position involves entering into an offsetting trade Most contracts are closed out before maturity Day trade – close out the position in the same day Spread transaction – a long position and a short position in the same asset and for different maturity months

Volume of trading

th number the b of f trades t d in i 1 day d

Settlement price

the price just before the final bell each day used for the daily settlement process
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Delivery and Price Quotes

Delivery months

For many futures contracts, contracts the delivery period is the whole month At any given time, contracts trade for the closest delivery month and a number of subsequent delivery months The first trading day and the last trading day

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 example, those on stock indices and Eurodollars) are settled in cash
Futures Pric F ce ($ per oz z)
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Futures Prices for Oil on February y 4, 2004: Prices Decrease with Maturity
(b) Brent Crude Oil