Tài chính doanh nghiệp - Chapter 22: Futures markets

Chapter 22Futures MarketsForward - an agreement calling for a future delivery of an asset at an agreed-upon priceFutures - similar to forward but feature formalized and standardized characteristicsKey difference in futuresSecondary trading - liquidityMarked to marketStandardized contract unitsClearinghouse warrants performanceFutures and ForwardsFutures price - agreed-upon price at maturityLong position - agree to purchaseShort position - agree to sellProfits on positions at maturityLong = spot minus original futures priceShort = original futures price minus spotKey Terms for Futures ContractsProfits: Futures Buyers and Call BuyersProfitPrice0Call BuyerFutures BuyerFoProfits: Futures Sellers and Put Buyers0ProfitsPriceFutures SellerPut BuyerFoAgricultural commoditiesMetals and minerals (including energy contracts)Foreign currenciesFinancial futuresInterest rate futuresStock index futuresTypes of ContractsClearinghouse - acts as a party to all buyers and sellers.Obligated to deliver or supply deliveryClosing out positionsReversing the tradeTake or make deliveryMost trades are reversed and do not involve actual deliveryTrading MechanicsInitial Margin - funds deposited to provide capital to absorb lossesMarking to Market - each day the profits or losses from the new futures price are reflected in the account.Maintenance or variation margin - an established value below which a trader’s margin may not fall.Margin and Trading ArrangementsMargin call - when the maintenance margin is reached, broker will ask for additional margin fundsConvergence of Price - as maturity approaches the spot and futures price convergeDelivery - Actual commodity of a certain grade with a delivery location or for some contracts cash settlementMargin and Trading ArrangementsSpeculation - short - believe price will falllong - believe price will riseHedging -long hedge - protecting against a rise in priceshort hedge - protecting against a fall in priceTrading StrategiesBasis - the difference between the futures price and the spot priceover time the basis will likely change and will eventually convergeBasis Risk - the variability in the basis that will affect profits and/or hedging performanceBasis and Basis RiskSpot-futures parity theorem - two ways to acquire an asset for some date in the futurePurchase it now and store itTake a long position in futuresThese two strategies must have the same market determined costsFutures PricingSpot-Futures Parity TheoremWith a perfect hedge the futures payoff is certain -- there is no riskA perfect hedge should return the riskless rate of returnThis relationship can be used to develop futures pricing relationshipHedge Example: pp.806-807Investor owns and S&P 500 fund that has a current value equal to the index of $900Assume dividends of $20 will be paid on the index at the end of the yearAssume futures contract that calls for delivery in one year is available for $925Assume the investor hedges by selling or shorting one contract Hedge Example OutcomesValue of ST 885 925 965Payoff on Short (1,345 - ST) 40 0 -40Dividend Income 20 20 20Total 945 945 945Rate of Return for the HedgeGeneral Spot-Futures ParityRearranging termsArbitrage Possibilities If spot-futures parity is not observed, then arbitrage is possibleIf the futures price is too high, short the futures and acquire the stock by borrowing the money at the riskfree rateIf the futures price is too low, go long futures, short the stock and invest the proceeds at the riskfree rateTheories of Futures PricesExpectations Normal BackwardationContangoContangoNormal BackwardationTimeDelivery dateFutures pricesExpectations HypothesisFutures and Expected Spot Price: Theories