Slide 1AgendaWhat’s Futures Contract?The differences between futures and forward contractsClearinghouseBasics of Futures ContractsBasic Economic FunctionsHedging Example – Corn FuturesMargins RequirementsMargins RequirementsMargin Example - Gold FuturesFinancial FuturesFinancial FuturesExample:10 yr US Treasury Note FuturesFuture ContractSourcesQuestions?Getting Into and Out of Futures Contracts BA 543Xinwei WU05/18/2011AgendaWhat’s Futures Contracts?Differences between Futures and ForwardClearinghouse for FuturesImportant Basics of FuturesEconomic FunctionsMargin RequirementsFinancial FuturesWhat’s Futures Contract? An agreement made today regarding the terms of a trade that will take place later. Financial futures (i.e. S&P 500, T-bonds, foreign currencies, interest rate and other.) Commodity futures ( i.e. wheat, crude oil, cattle etc.)The differences between futures and forward contractsClearinghouseFunction - Guarantee transaction will perform - Make unwinding positions prior simpleMajor Exchanges: 1848 Chicago Board of Trade (CBOT) 1872 New York Mercantile Exchange 1874 Chicago Mercantile Exchange 1882 Kansas City Board of Trade CBOT, NYMEX and CME have merged to be the CME group.Basics of Futures Contracts Five Key Elements: Underlying Asset Contract Size Maturity/Expiration Date Delivery/Settlement Type: Physical & Financial Future Price Long (buy) Futures & Short (sell) Futures: Like stocks Liquidity - Two choices: Liquidated prior to the settlement date & Wait until the settlement date - Measure: The # of contracts that have been entered into but not yet liquidated.Basic Economic FunctionsFutures contracts provide an opportunity for market participants to hedge against the risk of adverse price movements. (Hedgers transfer price risk.)Futures contracts are also used for speculation. (Speculators absorb price risk.)Hedging Example – Corn FuturesFarmer has 10,000 bushels of corn to sell in Dec.Cost of plant and harvest = $6.2/bushelWhat happens without or with hedging?Margins Requirements Futures, just like stocks, are traded only by exchange members (Firms, Individuals, or brokerage firms.) Initial Margin - Required when futures position is established - Depend on the price of underlying assets and type of traderMargins RequirementsMaintenance Margin The futures exchange adds or subtracts your money from initial deposit of trading account daily when the price changes. If the balance of trading account too low, the exchange issues a margin call. Deposit more moneyFutures position can be closed at any time.Margin Example - Gold FuturesGo long 10 Aug 2011 Gold FuturesInitial Margin = 6751/contractMaintenance Margin = 5001/contractFinancial FuturesMore efficient means for investors to alter their risk exposure to an asset.Tie together with cash market.Financial FuturesStock Index FuturesSingle Stock Futures Narrow-Based Stock IndexesInterest Rate FuturesEurodollar FuturesFederal Funds FuturesTreasury Bill FuturesTreasury Bond FuturesTreasury Note FuturesExample:10 yr US Treasury Note Futures Underlying Asset: 10 yr US Treasury NoteContract Size: One US Treasury note having a face value at maturity of $100,000Maturity Date: Sep 2011(Last business day of Sep.)Settlement Type: Federal Reserve book-entry wire-transfer system Price Unit: 121’190 Points ($1,000) and halves of 1/32 of a point. Par is on the basis of 100 pointsValue of 1 Sep 2011 Contracts = 121’190%*$100,000 = 121(19/32)%*$100,000 =$118,593.75Future Contract In early history, only agricultural commodities were traded in these exchanges (i.e. corn, wheat.) Today, agricultural futures still play an important role in futures exchanges. On the other hand, financial futures are also important and successful.SourcesWikipediaCME Group http://www.cmegroup.com/Questions?Topic: Getting into and out of Futures ContractsPresenter: Xinwei
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