22: Futures Market Flashcards
Forward/Futures Contract Definition
An agreement calling for future delivery of an asset at an agreed-upon price.
Futures Price Definition
The price at which the futures trader commits to make or take the delivery of the underlying asset.
Long Position Definition (Futures)
The futures trader who commits to buying the underlying asset.
Short Position Definition (Futures)
The futures trader who commits to selling the underlying asset.
Single-Stock Futures Definition
Futures contracts on a single stock instead of a broad-based index.
Clearinghouse Definition
Facilitates transfer of securities. For options and futures contracts, acts as the middleman between two traders.
Open Interest Definition
The number of outstanding futures contracts.
Margin Definition
An established value below which a trader’s margin cannot fall.
Convergence Property (Futures) Definition
The meeting of futures prices and spot prices at the maturity of the futures contract.
Cash Settlement Definition
The provision of some futures contracts that requires settlement according to the monetary value of the underlying asset as opposed to delivery.
Basis Definition
The difference between the futures price and the spot price at time t.
Basis Risk Definition
Attributable to uncertain movements in the spread between the futures price and the spot price.
Calendar Spread Definition
Buy one option and write another with a different expiration date.
Spot-Futures Parity Theorem
Describes the theoretically correct relationship between spot and futures prices. Violation allows arbitrage.
Marking to Market Definition
Daily settlement of obligations of futures positions.
Describe the positions of two traders in a futures contract.
The long position buys the underlying asset and the short position sells it.
How can a trader in the long position of the futures contract make a profit?
If the price of the asset at the maturity of the contract exceeds the future price because they are getting it at a discount.
How can a trader in the short position of the futures contract make a profit?
If the price of the asset at the maturity of the contract is less than the futures price because the trader is selling it at a higher price.
If the price of an asset exceeds the futures price at the maturity date, does the short or long position profit?
The long position profits.
If the price of an asset is less than the futures price at the maturity date, does the short or long position profit?
The short position profits.
What is the difference between futures and forwards contracts?
Futures contracts are more standardized. Futures contracts involve marking to market, in which gains and losses are settled daily, whereas forwards contracts involve no cash transfers until maturity.
What is the benefit of standardization of futures contracts?
Increased liquidity because there are many options for buyers and sellers.
How do you calculate the long position’s gain or loss?
P_T - F_0
Where P_T is the spot price at time T and F_0 is the original futures price.
The long position makes a gain if the spot price exceeds the original futures price at time T.
How do you calculate the short position’s gain or loss?
F_0 - P_T
Where P_T is the spot price at time T and F_0 is the original futures price.
The short position makes a gain if the original futures price exceeds the spot price at time T.
