Escolar Documentos
Profissional Documentos
Cultura Documentos
Futures Contracts
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Learning Objectives
Understand what a futures contract is and how
futures markets are organised.
Understand the system of deposits, margins and
marking-to-market used by futures exchanges.
Understanding the determinants of futures price.
Understand that speculation and hedging with
futures contracts may be imperfect.
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Characteristics of Futures
Market
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Margin calls
A requirement that extra funds be deposited as a
result of adverse price movements in the price of
a contract.
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A futures price must be less than (or equal to) the current
spot price plus the carrying cost.
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E S S C risk factor
F futures price
S current spot price
C carrying cost
The maximum value that the expected spot price, E(S), can be,
given the current spot price, S, the carrying cost, C, and a risk
factor is given by:
F S C
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Speculating
In the simplest case, a speculator hopes to:
Take a long position (i.e. buy) when the futures price is
low, reversing out (i.e. selling later) when the futures
price has increased; and/or
Take a short position (i.e. sell) when the futures price is
high, reversing out (i.e. buying later) when the futures
price has decreased.
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Speculating (cont.)
Scalping:
Scalpers try to develop a continuously updated
feel for the market, anticipating and exploiting
perceived short-term excesses of supply or
demand.
Spreading:
A spread is a long (bought) position in one
maturity date, paired with a short (sold) position
in another maturity date.
Day trading:
Day traders are prepared to trade as they see
fit during a trading day, but regard an overnight
position as too risky.
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Speculating (cont.)
Long-term/overnight position taking:
The simplest and riskiest type of speculation.
Speculators form a view that the current futures
price is too low (or too high), trade accordingly,
and wait for events to prove them right.
Straddling:
A straddle is similar in concept to a spread but
refers to positions in futures contracts on different
commodities.
For example:
A speculator might buy a March bank bill contract
and sell a March bond contract.
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Hedging
Example
A grazier intends to sell his cattle in several
months time.
He is affected by movements in the spot
price of cattle:
Gaining if it increases (his cattle become
more valuable).
Losing if it decreases (his cattle become less
valuable).
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Hedging (cont.)
Short hedger
Table 17.3
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Hedging (cont.)
Long hedger
Table 17.4
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Specification differences:
Refers to the fact that the specification of the commodity that is
the subject of the futures contract may not precisely correspond to
the specification of the commodity that is of interest to a hedger.
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N s S0
N f F0
where:
S0 spot price per unit when the hedge is entered(today)
F0 futures price per unit when the hedge is entered(today)
N f number of units of the commodity covered by each futures contract
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planned borrowing:
actual borrowing:
1m
= $989267.13
[1 + (90 x 0.044/365)]
1m
= $986619.81
[1 + (90 x 0.055/365)]
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Futures market
1m
=$989,701.68
[1 + (90 x 0.0422/365)]
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Uses
Can be used in ways similar to those explained for the
bank bill contract.
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Specifications
Example 17.13
On 23 January 2008, the S&P/ASX 200 Index closed
at 5412.3 and the March (2008) SPI200 futures price
was $5379.
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$5 250
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f
*
NS
s
0
Nf 0
F
value of spot
position
value
of one futures contract
$1 510 7000
5421X$25
111.47
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F S C
F futures price
S current spot price
C carrying cost
F S C
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
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F S 1 it
F S PV D 1 r
where:
PV D present value of the dividends
F futures price
S current spot price
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Forward-Rate Agreements
(FRAs)
An agreement to pay or receive a sum of money
representing an interest differential, such that the
interest rate applicable to a specified period is
fixed.
Typically a private arrangement that cannot be
traded on a secondary market.
Usually, at least one of the parties to an FRA will
be a bank or some other financial institution.
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Example of an FRA
Company A intends to borrow $1m in 3 months, to
be repaid in a lump sum 180 days later.
Present interest rate on 180-day loan is 9.4%.
Company A approaches Bank B to set up a forward
rate agreement.
Bank B does this at 9.5%.
At the FRA settlement date the market interest rate
is 10.25%.
Settlement amount is the difference between the
present value of $1m discounted at the contract rate
and the present value of $1m discounted at the
current market rate (differential: $3363.11).
Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
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Summary
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