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FUTURES CONTRACTS

FUTURES CONTRACTS. CONTRACT TO PURCHASE AN ASSET AT A SPECIFIC PRICE AT A SPECIFIC TIME IN THE FUTURE FUTURE CONTRACTS INCLUDE AGRICULTURAL COMMODITIES, PRECIOUS METALS, ENERGY, CURRENCIES, INTEREST RATES EXCHANGE-TRADED FUTURES OVER-THE-COUNTER FUTURES USED FOR HEDGING, SPECULATION

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FUTURES CONTRACTS

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  1. FUTURES CONTRACTS • CONTRACT TO PURCHASE AN ASSET AT A SPECIFIC PRICE AT A SPECIFIC TIME IN THE FUTURE • FUTURE CONTRACTS INCLUDE AGRICULTURAL COMMODITIES, PRECIOUS METALS, ENERGY, CURRENCIES, INTEREST RATES • EXCHANGE-TRADED FUTURES • OVER-THE-COUNTER FUTURES • USED FOR HEDGING, SPECULATION • ALMOST ALWAYS SETTLED WITH CASH

  2. HEDGING EXAMPLE • SELLER OF COMMODITY WANTS TO LOCK IN PRICE FOR FUTURE MONTHS RATHER THAN TAKING RISK ON FUTURE SPOT PRICE • MAY WANT TO LOCK IN PROFIT • MAY THINK THAT PRICES COULD GO DOWN IN FUTURE BELOW AVAILABLE FUTURES PRICE • MAY BE REQUIRED TO LOCK IN BY LENDERS • BUYER OF COMMODITY WANTS TO LOCK IN PURCHASE PRICE FOR FUTURE NEEDS RATHER THAN TAKING RISK ON FUTURE SPOT PRICE • MAY WANT TO LOCK IN PROFIT ON FINISHED PRODUCT • MAY THINK THAT PRICES COULD GO UP IN FUTURE ABOVE AVAILABLE FUTURES PRICE • MAY BE REQUIRED TO LOCK IN BY LENDERS • SPECULATOR BELIEVES THAT PRICES WILL BE HIGHER/LOWER THAN LISTED PRICE AND WILL BUY OR SELL WITH HOPE OF MAKING PROFIT

  3. OPTIONS CONTRACTS • CONTRACT WITH RIGHT, BUT WITH NO OBLIGATION, TO BUY OR SELL AN ASSET AT A SPECIFIED PRICE PRIOR TO A SPECIFIED DATE • CALL OPTION—RIGHT TO PURCHASE • PUT OPTION—RIGHT TO SELL • STRIKE PRICE, EXPIRATION DATE • EXCHANGE-TRADED OPTIONS • OVER-THE-COUNTER OPTIONS • USED FOR HEDGING, SPECULATION • ALMOST ALWAYS SETTLED WITH CASH

  4. OPTIONS EXAMPLE • HEDGING • SELLEROF COMMODITY WANTS TO LOCK IN PRICE BUT DOESN’T WANT TO BE COMMITED IN CASE PRICE GOES UP SUBSTANTIALLY • BUYER OF COMMODITY WANTS TO LOCK IN PURCHASE PRICE BUT IS CONCERNED THAT PRICES COULD DROP SUBSTANTIALLY SPECULATION • SELLER, BUYER OR SPECULATOR BELIEVES THAT OPTION IS MISPRICED AND SEES SIGNIFICANT PROFIT POTENTIAL • EMPLOYEE STOCK OPTIONS • COMPANY-ISSUED TO INCENTIVIZE KEY EMPLOYEES • MAJOR SOURCE OF WEALTH CREATION

  5. PRICING OF FUTURES CONTRACTS AND OPTIONS • FUTURES CONTRACTS • INFLATION FACTOR • INTEREST RATE FACTOR • SEASONAL FACTOR • BUSINESS FACTORS • OPTIONS • VOLATILITY FACTOR • INFLATION FACTOR • INTEREST RATE FACTOR • BUSINESS FACTORS • BLACK-SCHOLES MODEL

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