Tài chính doanh nghiệp - Chapter 18: Futures contracts

Chapter 18Futures ContractsLearning ObjectivesUnderstand what a futures contract is and how futures markets are organised.Understand the system of deposits, margins and marking-to-market used by futures exchanges.Have some understanding of the determinants of futures price.Learning Objectives (cont.)Understand and be able to explain that speculation and hedging with futures contracts may be imperfect.Understand and explain the features of the major financial futures contracts traded on the Sydney Futures Exchange.Explain speculation and hedging strategies using the major financial futures contracts traded on the Sydney Futures Exchange.Learning Objectives (cont.)Understand the valuation of 90-day bank-accepted bill futures contracts and share-price index futures contracts.Understand and explain the uses of forward-rate agreements.Futures ContractsA futures contract is an agreement which provides that something will be sold in the future at a fixed price. The price is decided today, but the transaction is to occur later.Australian futures contracts are traded on the Sydney Futures Exchange (SFE).Forward ContractsA forward contract will have the following features:The forward price is decided now but the transaction is to occur on a nominated future date.The details of the commodity which is the subject of the contract are spelt out.The contract is a private contract between you and I. I cannot pass on to anyone else my responsibility to deliver the commodity and, likewise, you cannot pass on to anyone else your responsibility to accept delivery of the commodity. Futures ContractsA futures contract on gold will also have features 1 and 2 of a forward contract.However, feature 3 is not true of a futures contract.A futures contract is not a personalised agreement.It is essentially a forward contract which can be traded on an exchange.Characteristics of Futures MarketStandardised contract sizes and maturity dates. Clearing house guarantees performance of all contracts, both buyers and sellers.Futures contracts require you to put up deposits and satisfy margin calls if required.Contracts usually closed out at or before maturity rather than physically delivered.Deakin Futures MarketDateNumberPrice $Price $Number1 MarchB1610610S1Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 MarchB1 = S1610610B1 = S1Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 MarchB1 = S1610610B1 = S11 March B2 = S2611611B2 = S2Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 MarchB1 = S1610610B1 = S11 March B2 = S2611611B2 = S21 MarchB12 = S12608608B12 = S121 MarchB19 = S19615615B19 = S191 MarchB37 = S37614614B37 = S37Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 MarchB1 = S1610610B1 = S11 March B2 = S2611611B2 = S21 MarchB12 = S12608608B12 = S121 MarchB19 = S19615615B19 = S191 MarchB37 = S37614614B37 = S378 MarchB200 = S200620620B200 = S200Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 MarchB1 = S1610610B1 = S11 March B2 = S2611611B2 = S21 MarchB12 = S12608608B12 = S121 MarchB19 = S19615615B19 = S191 MarchB37 = S37614614B37 = S378 MarchB200 = S200620620B200 = S200Deakin Futures Market (cont.)DateNumberPrice $Price $Number1 March610B1 = S11 March B2 = S2611611B2 = S21 MarchB12 = S12608608B12 = S121 MarchB19 = S19615615B19 = S191 MarchB37 = S37614614B37 = S378 MarchB200 = S200620Deakin Futures Market (cont.)B1 owes the clearing house $610.B1 (=S200) is owed by the clearing house $620.Therefore, the clearing house owes B1 $10.Deakin Futures Market (cont.)Buyers and sellers do not need to know the identity or credit worthiness of other buyers and sellers.But B1 must notify exchange that she is S200.Note no silver changed hands.Note ‘short selling’ is possible.Deposits, Margin Calls and the Mark-to-Market RuleDepositsAll traders are required to open an account and deposit a specified amount of money with the clearing house before entering into first contract.Mark-to-market.The clearing house adjusts the recorded value of an asset to its market price on a daily basis. Margin callsA requirement that extra funds be deposited as a result of adverse price movements in the price of a contract.The Present Value of a Futures ContractA futures contract does not require a payment on initiation, so it is clear that the present value of a futures contract must be zero.Accordingly, it is, in a sense, impossible to calculate a rate of return on a futures contract.If the outlay is zero, any subsequent gain is an infinite percentage gain and any subsequent loss is an infinite percentage loss.The Sydney Futures Exchange (SFE)Opened for trading in 1960, was then called Sydney Greasy Wool Futures Exchange — reflecting the importance of the commodity (agricultural) futures at that stage.SFE operates own clearing house to:Establish and collect deposits.Call in margins.Apportion the gains and losses.SFE ContractsThe contracts available include:90-day bank accepted bills3-year Australian Treasury Bond10-year Australian Treasury BondStandard & Poors, ASX 200 (SPI200)30-day inter-bank cash rate contractIndividual share futures (on approximately ten companies)Australian dollarOptions on futures contractsThe bulk of trading on the SFE is in the first four contracts listed above.Determinants of Futures PricesFutures pricing theoremThe futures price for a late-delivery contract must be less than (or equal to) the futures price for an equivalent early-delivery contract, plus the carrying cost.The carrying cost is the cost of holding a commodity from one time period to another.It includes an interest factor (opportunity cost of funds used to finance the holding of the commodity) and in the case of physical commodities, the costs of insurance and storage.Determinants of Futures Prices (cont.)Substituting ‘the spot price’ for ‘the futures price for an equivalent early-delivery contract’, the theorem becomes:A futures price must be less than (or equal to) the current spot price plus the carrying cost.In this way, the theorem provides a maximum price for the futures contract, given the current spot price and the carrying cost.Determinants of Futures Prices (cont.)Algebraically, the theorem can be written as: Determinants of Futures Prices (cont.)The maximum value that the expected spot price, E(S), can be, given the current spot price, S, the carrying cost, C, and a risk factor is given by:Clearly, there must be some linkage between the expected spot price and the futures price.If there is a big difference between the expected spot price and futures price, it may reflect an arbitrage opportunity, depend on perceptions about the risk factor.Futures Market Strategies: Speculating and HedgingSpeculator: someone who has traded in a futures contract but who has no direct interest in the ‘commodity’ underlying the futures contract.Affected by the futures price (but not the spot price) of the commodity.By trading in futures contracts, the speculator is exposed to the risks of changes in the futures price — a risk to which they would not otherwise have been exposed.Futures Market Strategies: Speculating and Hedging (cont.)Hedger: someone who has traded in a futures contract and has a ‘genuine’ interest in the ‘commodity’ underlying the futures contract.Affected by both the futures price and the spot price of the commodity.The hedger is exposed to the risk of changes in the futures price, but only in an attempt to offset the pre-existing risk of changes in the commodity price itself.SpeculatingIn the simplest case, a speculator hopes to:Take a long position (that is, buy) when the futures price is ‘low’, reversing out (that is, selling later) when the futures price has increased; and/orTake a short position (that is, sell) when the futures price is ‘high’, reversing out (that is, buying later) when the futures price has decreased.In either case, the speculator gains. However, if the opposite occurs, the speculator loses.Speculating (cont.)Table 18.2Speculating (cont.)Scalping:A scalper will only hold a futures contract for an extremely short time period (seconds or minutes).Scalpers try to develop a continuously updated ‘feel’ for the market, anticipating and exploiting perceived short-term excesses of supply or demand.Scalpers perform the useful function of providing liquidity to the market.Speculating (cont.)SpreadingA ‘spread’ is a long (bought) position in one maturity date, paired with a short (sold) position in another maturity date.Example — A bought March bank bill futures and A sold June bank bill futures. This spread will be adopted if speculators believe that the current difference between the two futures prices is too wide.Speculators will gain if the difference (or ‘spread’) narrows.Speculating (cont.)StraddlingA ‘straddle’ is similar in concept to a spread but refers to positions in futures contracts on different commodities.For exampleA speculator might buy a March bank bill contract and sell a March bond contract.Speculating (cont.)Day tradingDay traders are prepared to trade as they see fit during a trading day, but regard an overnight position as too risky.Long-term/overnight position taking:The simplest and riskiest type of speculation.Speculators form a view that the current futures price is too low (or too high), trade accordingly, and wait for events to prove them right. HedgingExampleA grazier intends to sell his cattle in several months’ time.He is affected by movements in the spot price of cattle:Gaining if it increases (his cattle become more valuable).Losing if it decreases (his cattle become less valuable).To be protected against these changes, he can sell cattle futures, that is, he becomes a short hedger.Hedging (cont.)Table18.3Short hedgerSomeone who hedges by means of selling futures contracts today (going short).Hedging (cont.)Long hedgerSomeone who hedges by means of buying futures contracts today (going long).Table 18.4Some Reasons Hedging with Futures is ImperfectImperfect convergenceThe price of a futures contract with zero time to maturity ought to be equal to the spot price.However, in reality the futures price at maturity can be slightly different from the spot price. The convergence between the spot and futures price as the maturity date approaches can be imperfect.Although this convergence will be imperfect, it may not be possible to profit from this difference, due to transaction costs.Some Reasons Hedging with Futures is Imperfect (cont.)Basis riskA hedger will plan to transact in the spot market at some future date. However, it is usual for the date of the planned spot transaction to coincide with the maturity date of a futures contract.Futures exchanges will offer only a restricted number of maturity dates.When the dates do not coincide, the hedger must reverse out of the futures contract before it matures and faces a risk known as ‘basis risk’.Some Reasons Why Hedging With Futures is Imperfect (cont.)Basis: the spot price S at a point in time minus the futures price F (for delivery at some later date) at that point in time.At time zero the basis B is: B (0) = S (0) – F (0)At time 1 the basis B is: B (1) = S (1) – F (1)Consider a short hedger: makes a gain (loss) on the futures contract if the futures price decreases (increases), and a gain (loss) on holding the commodity if the spot price increase (decreases).Some Reasons Why Hedging With Futures is Imperfect (cont.)The point is simple: the change in the basis over a given time period is not, in general, precisely zero.Some Reasons Why Hedging With Futures is Imperfect (cont.)Specification differencesRefers to the fact that the specification of the ‘commodity’ that is the subject of the futures contract may not precisely correspond to the specification of the ‘commodity’ that is of interest to a hedger.Example: a hedger may be interested in a particular grade of wool that is slightly different to the grade of wool specified in the futures contract.Hedging and RegrettingHedging can be used to reduce losses which would otherwise have been incurred.However, it should not be forgotten that, by its very nature, hedging also reduces profits which would otherwise have been made.Selecting the Number of Futures ContractsSuppose that a hedger has an interest in NS units of a ‘commodity’. If this interest is a long (short) position, then NS is positive (negative).The optimum number of futures contracts f * is: The Bank Bill Futures ContractContract specifications for 90-day bank-accepted bills:Contract unit — 90-day bank accepted bill with a face value of $1m.Delivery months — Mar., June, Sept., Dec. up to 3 years out.Delivery day — first business day after last trading day.Quotations — 100 minus annual percentage yield to two decimal places.Settlement — cash or physical settlement.Settlement date — the second Friday of the delivery month.Hedging with Bank Bill FuturesAnnamay Ltd needs to borrow in 2 weeks’ time by issuing a 90-day bank bill with a face value of $1m. Currently, bank bill rates are 4.4%.Risk: that the bill rate would increase; therefore, the company decided to protect itself by selling one BAB futures contract at 95.78 (4.22%).Hedging with Bank Bill Futures (cont.)ScenarioDuring the next 2 weeks, the 90-day bill rate increased and the bill was issued at 5.5%. At this date the BAB futures contract was priced at 94.70 (5.3%).Question: What is the result of this course of action?Physical marketHedging with 90-day Bank BillsFutures marketHedge reduces shortfall from $2647.32 to $45.73 (a reduction of 98.3%). 10-Year Treasury Bond Futures ContractContract specificationContract unit — 10-year government bond with a face value of $100 000 and a coupon rate of 6% p.a. Settled by cash, not delivery.Quotations — 100 minus the annual percentage yield.UsesCan be used in ways similar to those explained for the bank bill contract.Share Price Index (SPI 200) Futures ContractSpecificationsContract unit: value of the S&P/ASX 200 Index, multiplied by $25.Settlement — not deliverable, closed out at the close of trading at the relevant spot index value, calculated to one decimal place.Quoted as the value of the S&P/ASX 200 Index (to one full index point).Trading ceases at 12 noon on the third Thursday of the contract month.Speculation with the SPI FuturesExampleOn 1 September 2004, the S&P/ASX 200 Index closed at 3575.6 and the December (2004) SPI200 futures price was 3598.Suppose that a speculator believes that share prices are likely to rise in the following two weeks and therefore decides to buy December SPI200 futures.On 15 September 2004, the S&P/ASX 200 Index has risen to 3625.1 and the December SPI futures price has fallen to 3638.Speculation with the SPI Futures (cont.)The total gain can be calculated as follows:Notional sale at: 3598 x $25 = $89 950 (outflow) Notional purchase at: 3328 x $25 = $90 950 (inflow)Gain (net inflow): $1 000Hedging with SPI FuturesExample 18.14Michael Saint manages a portfolio of Australian shares with a current market value of $1 510 700.The portfolio is to be sold in 4 weeks’ time.The SPI 200 futures price today is 3162.Assume that proportionate changes in the portfolio’s value will be matched by proportionate changes in the futures price.Hedging with SPI Futures (cont.) Number of futures contracts needed to hedge the portfolio: Hedging with SPI Futures (cont.)Table 18.11Hedging with SPI Futures (cont.)Therefore the hedge has, in fact, resulted in a net gain of: $72 675 – $66 250 = $6 425Valuation of Financial Futures ContractsA restriction on the valuation of futures contract is given by: Valuation of Financial Futures Contracts (cont.)If the commodity can readily be sold short, and if the opportunity cost of investment is the only form of carrying cost, then: Valuation of Bank Bill Futures ContractsIf it is assumed that bank bills can be sold short, then the above equation should apply to bank bill futures.It is usual to express C in terms of the yield it applicable to the term t of the future contract. The bank bill futures price is simply the spot price of the relevant bank bill, accumulated at the yield applicable to the term of the futures contract.Valuation of SPI Futures ContractsThe valuation of the SPI futures contract is slightly more complex, because dividends are paid on many shares in the index but the calculation of the SPI excludes dividends. Forward Rate AgreementsAn agreement to pay or receive a sum of money representing an interest differential, such that the interest rate applicable to a specified period is fixed. Typically a private arrangement that cannot be traded on a secondary market.Usually at least one of the parties to a FRA will be a bank or some other financial institution.Example of FRACompany A intends to borrow $1m in 3 months, to be repaid in a lump sum 180 days later. Present interest rate on 180-day loan is 9.4%.Company A approaches Bank B to set up a forward rate agreement. Bank B does this at 9.5%. Example of FRA (cont.)At the FRA settlement date the market interest rate is 10.25%.Settlement amount is the difference between the present value of $1m discounted at the contract rate and the present value of $1m discounted at the current market rate (differential: $3363.11).Speculation — BaringsBarings Bank is a notorious example of futures speculation gone wrong.Barings Bank collapsed in 1995 because of futures losses incurred by a Singapore-based trader, Nick Leeson.He bought Japanese stock index futures contracts on the Singapore International Money Exchange (SIMEX) and sold them on the Osaka exchange.Speculation — Barings (cont.)This is basically an arbitrage activity, which in efficient markets (or on average) should not yield excess returns.However, he managed to separate losses and profits into two separated accounts, exposing profits of ¥28m and hiding losses of ¥180m.In January 1995, he took long positions in Japanese stock index futures, hoping they would rise and deliver a profit.Speculation — Barings (cont.)However, an earthquake in Japan caused the market to fall 13%, delivering huge losses.Leeson fled Singapore with US$3b in open positions, which resulted in total losses of US$1.4b.Hedging — MetallgesellschaftMetallgesellschaft was a German company operating in the US as MG Refining and Marketing(MGRM). In 1992, sales strategy of offering US firms long-term fixed-price contracts on gasoline, heating oil and diesel fuel.If firms agreed to buy from MGRM, they would receive 10-year fixed-price contracts.Hedging — Metallgesellschaft (cont.)These contracts could result in large losses for MGRM if oil prices rose significantly.To cover their obligations, MGRM bought long positions on the New York Mercantile Exchange.Problem: 10-year futures contracts did not exist.Solution: MGRM bought the longest contracts available and, when they expired, rolled over into new ones.Hedging — Metallgesellschaft (cont.)In 1993, oil prices fell by one-third.This was good for the business with contracts to deliver at fixed prices.However, the futures contracts incurred large losses, offsetting potential profits and resulting in large margin calls.Hedging — Metallgesellschaft (cont.)The gains on their contracts to deliver would not be realised for up to 10 years.Their futures losses were being margin called immediately.Parent company decided to liquidate futures contracts, incurring losses.Hedging — Metallgesellschaft (cont.)Soon after, oil prices rose and the potential gains on contracts to deliver over the next 10 years disappeared, serving a double blow to the company.Company losses for the year totalled US$1.7b.If the firm could have raised funds to meet margin calls, the hedge probably would have succeeded.SummaryFutures: Obligation to deliver/receive a physical or financial commodity at a future date.Futures markets are based on a clearing house, system of deposits, marking to market and margin calls.Fu