Mechanics of Futures Markets 經濟碩二 曾文賢. Chapter2. 2-1 Background. The Chicago Board of Trade (CBOT 1848 ) The Chicago Mercantile Exchange (CME 1919 ) We examine how a futures contract come into existence by considering the corns futures contract traded on CBOT Example:
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Mechanics of Futures Markets
1. Sell (i.e., short) a futures contract
2. Buy the asset
3. Make delivery
- Licensing futures exchange
- Approving contracts
- Forcing exchanges to take action
- All outstanding positions above certain levels
must be reported to CFTC (pls. see Commitment
Of Traders Report which is issued weekly)
- If the contract does qualify as a hedge, gains or losses are recognized, the latter treatment is referred to as hedge accounting .
- In June 1998, the Financial Accounting Standards Board is issued FASB Statement No.133(FAS 133), Accounting for Derivatives Instruments and Hedging Activities.
- For a corporate taxpayer, capital gains are taxed as ordinary income, and the ability to deduct losses is restricted.
- For the non-corporate taxpayer, it gives rise to capital gains and losses treated as if they were 60% long term and 40% short term without regard to the holding period. (“60/40” rule)
- Gains or losses from hedging transaction are treated as ordinary income.