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Agenda
Quick , very quick take on markets
Fundamentals of Forwards, Futures
Clearing House
Daily Settlement
Margins
Markets
Exchange traded: standardization, traded
on organized exchanges (CME, LIFFE,Eurex)
OTC: non-standardized, negotiated, traded
anywhere else
Uses
Hedging, speculation, or arbitrage
Forward Commitments
Agreement between two parties in which
one party, the buyer, agrees to buy from
the other party, the seller, an underlying
asset at a future date at a price
established at the contract initiation.
Main characterization: obligation by
BOTH parties
Types: forward contracts, futures
contracts, swaps
Forward Contracts
Purchase and sale of underlying asset
(stocks, fixed income instruments and
rates, currencies, commodities, etc.) at a
later date at a price agreed upon today
(maintenance?)
Non-standardized, customizable, OTC
transactions between large financial
institutions and/or corporations
Private and largely unregulated market
Future - Definition
A Legally binding agreement
To take or make delivery
Of a given quantity and quality of a
commodity
At an agreed price
On a specific date or dates in the future
Mnemonic
A futures contract fixes the price and
conditions
NOW
For a transaction that will take place in the
FUTURE
Clearing House
After the trade
Buyer
+1
-1
Member
firm
+1
Seller
-1
+1
Member Firm
-1
Clearing House
After Clearing
Buyer
+1
-1
Member
firm
+1
Seller
-1
-1
CLEARING
HOUSE
+1
+1
Member Firm
-1
Counterparty Risk
Always only ONE counterparty.
Forward: Two OFFSETTING positions!
Once a futures position is closed out, ALL
profits or losses to date are realised and
NOTHING remains on the customers books.
This feature adds to liquidity and makes it
very easy to reverse any position in futures
This is in sharp contrast to the OTC market
Futures Markets
Variation on a forward contract
Public, standardized transaction that occurs on a
futures exchange
Exchange determines expiration dates, underlying
assets, size of the contracts, etc.
Default risk and the clearinghouse
Exchange is the counterparty in futures transactions
Marking-to-market
Daily settlement where profits and losses are charged
and credited to the short and long position each day
Offsetting transactions
Ability to unwind positions prior to expiration
Take an opposite position to the original contract
Review of Futures
Public, standardized transactions on
organized exchanges
Underlying asset, quality of asset, expiration
dates (months and maturities), size of
contract, price and position limits
Homogenization and liquidity = active secondary
market
Ability to take offsetting positions
Clearinghouse
Marking to Market
Example
Long Position
Day Beg. Funds
Settlement Price
Bal. Deposited Price
Chg
Gain
Revaluation
50
100
50
50
99.20
-0.80
-8
42
42
96.00
-3.20
-32
10
10
40
101.00
5.00
50
100
100
103.50
2.50
25
125
125
103.00
-0.50
-5
120
Day
Closin Change
g
in Price
Price
Margin
Margin
Account Flow
Explanation
Monday
1280
+5
5,625
-5,375
Profit of $250
Tuesday
1260
-20
4,625
Wednesday 1250
-10
5,625
-1,500
Loss of $500
depletes the
Margin a/c to
4,125. Margin
Call restores
the a/c to the
initial margin
level
Thursday
1255
+5
5,875
Friday
n/a
+10
+6,375
Previous days
margin a/c +
todays profit
Price Limits
Three options:
Futures vs Forwards
Markets
Futures Markets
Nil
STIR
V.Ravi Kumar
17/01/17
Eurodollar Contracts
CME contracts on 90-day, $1M notional
principal of Eurodollars
T-bills
Cash settled
One of the most widely traded contracts
because of use of LIBOR in swaps, FRAs and
interest rate options
Unlike Eurodollar deposits, which have addon interest, Eurodollar futures are quoted on
a discount basis, like T-bills
V.Ravi Kumar
17/01/17
http://www.cmegroup.com/trading/interest-ra
tes/stir/eurodollar_contract_specifications
.html
V.Ravi Kumar
17/01/17
Contract Details
V.Ravi Kumar
17/01/17
BLASH
Price Quote
100 points minus the three-month London
V.Ravi Kumar
17/01/17
Tick Size
17/01/17
Tick Value
V.Ravi Kumar
17/01/17
V.Ravi Kumar
17/01/17