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Introduction to Futures and Futures Market. Yu Chen-Wen President of the Futures Club, National Taiwan University Department of International Business. All Rights Reserved by the author The Information on this file may not be reproduced, republished or mirrored without permissions.

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introduction to futures and futures market

Introduction to Futures and Futures Market

Yu Chen-Wen

President of the Futures Club,

National Taiwan University

Department of International Business

All Rights Reserved by the author

The Information on this file may not be reproduced, republished or mirrored without permissions

main concept derivatives
Main Concept - Derivatives
  • A financial instrument whose value depends on (or derives from) the value of other, more basic underlying asset.
  • e.g : Futures, Options, Mortgage-back securities.
what is futures
What is Futures??
  • Futures contract is alike forward contract, but normally trade on an exchange.

example:

  • Forward contract is an agreement to buy or sell an asset at a certain futures time for a certain price.
  • example:
terminology in futures market how could we trade futures in taiwan
Terminology in Futures Market & How Could We Trade Futures in Taiwan
  • Lot
  • Position
  • Liquidation, Offset
  • Delivery
  • Open Interest
  • Margin
  • Margin Call
  • Settlement Price
an instance of futures market
An Instance of Futures Market
  • Three investors, A, B and C.
  • On Oct.10,2004, A long a TAIEX futures for NT1,000,000(5000 index point * NT200 per index point) which delivery month is Jan. 2005 and investor B is the opposite side of this contract.
  • On Nov. 20, the Taiwan Stock Exchange Capitalization Weighted Stock Index is 4500 point.
  • On Dec.5, B want to offset the position.The TAIEX futures which has the same delivery month is NT 900,000 on that day.
  • On Dec.15, investor C short a TAIEX futures for NT920,000 which delivery month is Jan. 2005.
  • On the third Wednesday of the Jan,2005. Cash settlement occur.TAIEX is 5200 point.
comparison of forward and futures contracts
Forward Contract

Trade on over-the counter market

Not standardized

Usually one specified delivery date

Settle at the end of contract

Delivery or final cash settlement usually take place

Futures Contract

Trade on an exchange

Standardized contract

Range of delivery dates

Settled daily

Contract is usually close out prior to maturity

Comparison of forward and futures contracts
question why people need futures

Question: why people need futures??

  • Hedgers
  • Speculators
  • Arbitrageurs

Type of Trader

futures market
Futures Market
  • CBOT(Chicago Board of Trade)
  • London International Financial Futures and Options Exchange
  • SIMEX(The Singapore Exchange)
  • TAIFEX(Taiwan Futures Exchange)
the growth in futures market taiex
The Growth in Futures Market (TAIEX)

Source:TAIEX Website

http://www.taifex.com.tw

futures category
In TAIEX

TAIEX Futures

Electronic Sector Index Futures

Finance Sector Index Futures

MiNi-TAIEX Futures

Taiwan 50 Futures

10-year Government Bond Futures

30-Day Commercial Paper Interest Rate Futures

Futures Category
futures category con t
Others

MSCI Taiwan Index Futures

CBOT mini-sized Silver Futures

Corn Futures

10 Year U.S. Treasury Notes Futures

CBOT Dow Jones U.S. Total Market Index Futures (TMI)

Futures Category (con’t)
determination of forward and futures price
Determination of Forward and Futures Price

*Selective Topic

T:Time until delivery date in a forward or futures contract (in years)

S0:Price of the asset underlying the forward or futures contract today

F0:forward or futures contract price today

r:Risk-free rate per annum, expressed with continuous compounding

K:delivery price in the contract

determination of forward and futures price in reality
Determination of Forward and Futures Price In Reality

The only determinant is “Demand & Supply”!!!!

We could to draw support from Technical Analysis

hedge strategies using futures
Hedge Strategies Using Futures

*Selective Topic

  • Minimum Variance Hedge Ratio

h* = ρ (σS / σF)

σS:Standard deviation of the change in spot price

σF: :Standard deviation of the change in futures price

ρ:Coefficient of correlation between the change in spot and futures price

h*:Hedge ratio that minimize the variance of the position

hedge strategies using futures con t
Hedge Strategies Using Futures(con’t)

*Selective Topic

  • Optimal Number of Contract

N* = [(h*NA)/ QF]

NA:Size of position being hedge(unit)

QF:Size of futures contract

N*:Optimal number of futures contracts for hedging

h*:Hedge ratio that minimize the variance of the position

case discussion
“Speculation in futures market is pure gambling. It’s not in the public interest to allow speculator to trade on futures exchange.” Do you agree this statement??

Consider a three-month TAIEX futures, suppose that the underlying index provides a dividend yield 1% per annum.The current index point is 5800 and the risk-free interest rate is 5%.How much this futures worth??

Case Discussion
reference
Reference
  • TAIEX,http://www.taifex.com.tw/
  • CBOT,http://www.cbot.com/
  • TSEC,http://www.tse.com.tw/
  • “Futures, Options, and Other Derivatives 5 edition” John Hull, Prentice Hall
  • “Technical Analysis of Financial Market” John J.Murphy,New York Institute of Finance