chapter 26 futures markets
Download
Skip this Video
Download Presentation
Chapter 26 – Futures Markets

Loading in 2 Seconds...

play fullscreen
1 / 12

Chapter 26 – Futures Markets - PowerPoint PPT Presentation


  • 104 Views
  • Uploaded on

Chapter 26 – Futures Markets. Forward Contracts A contract that two parties agree to today such that both parties are obligated to complete a transaction in the future Price set for transaction Delivery Date set for transaction Commodity set for transaction

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Chapter 26 – Futures Markets' - havyn


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 26 futures markets
Chapter 26 – Futures Markets
  • Forward Contracts
    • A contract that two parties agree to today such that both parties are obligated to complete a transaction in the future
      • Price set for transaction
      • Delivery Date set for transaction
      • Commodity set for transaction
      • Delivery Location set for transaction
    • Examples
      • Hotel Reservation, Airplane Ticket, Book Order
chapter 26 futures markets1
Chapter 26 – Futures Markets
  • Futures Contracts
    • Just like forward contract except
      • Traded on an Organized Exchange
      • No money changes hands between the two parties today
    • Terms Matching
      • Commodity to be delivered or received is the UNDERLYING
      • Price for transaction is the FUTURES PRICE
      • Delivery Date is the SETTLEMENT DATE
chapter 26 futures markets2
Chapter 26 – Futures Markets
  • Parties in the Futures Contract
    • Buyer of the Futures Contract is “buying or taking delivery of the commodity” in the future and is said to be LONG in the contract
    • Seller of the Futures Contract is “selling or making delivery of the commodity” in the future and is said to be SHORT in the contract
    • The Exchange where the futures contracts are bought and sold
    • Clearing House guarantees performance
chapter 26 futures markets3
Chapter 26 – Futures Markets
  • Example of a Forward Contract and the Parties Economic Incentives
    • Order a Book for Future Delivery
    • Parties
      • Buyer of the Book
      • Bookstore
    • Contract
      • Commodity Book
      • Delivery Date (Three Weeks)
      • Price $15.00
chapter 26 futures markets4
Chapter 26 – Futures Markets
  • Example Continued
    • During the 3 Week period
      • Buyer sees “ordered” book at Borders for $12.50
      • Buyer “skips” out of contract (fails to perform) and buys book at Borders saving $2.50
      • Bookstore has book and no buyer
    • During the 3 Week period
      • Bookstore sees book selling on eBay for $19.00
      • Bookstore “skips” out of contract and sells book on eBay for $19.00 making an extra $4
      • Buyer of contract still waiting for book
chapter 26 futures markets5
Chapter 26 – Futures Markets
  • Closer Look at the Contracts
    • Futures Price and Spot Price and Settle Price
      • Futures price is the contract agreed to price and varies through out the life of the contract as different parties “reach” different agreements
      • Spot price is the current market price for delivery and exchange of the commodity
      • Settle Price is the consensus price of the contract at the end of the trading day
    • Difference between YOUR contract futures price and the consensus end of day price each day reflects profit or loss on the contract
chapter 26 futures markets6
Chapter 26 – Futures Markets
  • An example of an Actual Contract
    • Wheat Futures at the Kansas City Board of Trade
      • Size of Contract is 5,000 bushels
      • Commodity is Hard Red Winter Wheat
      • Delivery is at Grain Storage Facility on the Missouri River near the Railroad Shipping Yards
      • Price stated in cents per bushel, 280
    • What does this mean?
      • Buyer Position and Seller Position of one contract
chapter 26 futures markets7
Chapter 26 – Futures Markets
  • Who are the traders involved in the contracts?
    • Originator of the contract
      • Hedgers and Speculators
        • Hedgers for Insurance (against future price movements)
        • Speculators betting on a price movement in their favor
      • Market Makers
        • Dealers trading for customers
        • Locals
chapter 26 futures markets8
Chapter 26 – Futures Markets
  • Profits and Losses
    • Zero Sum Game
      • For every dollar one party makes the party on the opposite side of the contract loses a dollar
      • Rising prices profit to buyer of the contract
      • Falling prices profit to seller of the contract
      • Hedgers always break even when considering their inventory position
    • Diagrams of Payoffs for Futures
chapter 26 futures markets9
Chapter 26 – Futures Markets
  • Getting In and Out of Contracts
    • Complete the contract (make or take delivery and pay or receive futures price)
    • Sell or Buy opposite position before delivery date
    • How can new buyer/seller be matched?
    • How can Clearing House guaranteeing the Performance of the buyer and seller?
    • MARGINS and Marking to Market
chapter 26 futures markets10
Chapter 26 – Futures Markets
  • Financial Futures
    • Settlement in Cash
    • Contracts traded against “fictitious” underlying
  • Questions on the Soundness of Trading Financial Futures – GAO Study
  • Governing the Futures Markets
    • Self Regulating Organizations
    • CFTC – Commodity Futures Trading Commission
chapter 26 futures markets11
Chapter 26 – Futures Markets
  • What happens to the Hedger when the inventories are short of the required delivery of the contract
    • Buying in the Spot
    • Delivery in the Spot and Close Futures Position
    • Gains or Losses from the different strategies
  • Forward Rate Agreements
    • Special Futures – i.e. a Forward Contract
ad