5014 - Finance of International Trade - Futures p194 - 219

Question 1

Futures Definition

Answer 1

A standardized contract to buy or sell a set quantity of a specific currency at a future date (settlement date) and at an agreed price (contract price)

Question 2

How are Futures standardized?

Answer 2

Standard Quantity of Currency / Commodity e.g. 32,500 , 50,000

Standard Quality ($,£, Crude Oil, Gold and so on)

Question 3

With Futures Contracts you either…

Answer 3

Buy and Sell

Short Sell - Sell and Buy

Question 4

What can futures be used for?

Answer 4

Hedging Risk

Question 5

How are futures used to hedge risk?

Answer 5

They can be used to lock in future prices to avoid unprecedented price fluctuations e.g. you could buy a futures contract for gold at $60 / gram executed in 6 months time, this avoids the risk of having to pay for gold at above 60 / gram in the case prices go up. Acts like an insurance policy in some way, guarantees what you are paying. This can be done with currencies too ofc

Question 6

Hedging With Futures Summary

Answer 6

• Hedging reduces risk by setting a minimum on what the price will be, acting as protection against volatile price fluctuations.

Question 7

Payments on Futures Contracts

Answer 7

Initial Margin

Daily Settlements

Maintenance Margin

Question 8

Initial Margin

Answer 8

The % of a purchase price that must be paid as a deposit to start trading

Question 9

Daily Settlements

Answer 9

Settlement price refers to the price at which an asset closes or of which a derivatives contract will reference at the end of each trading day and/or upon its expiration.

Question 10

Maintenance Margin

Answer 10

The minimum amount of equity that an investor must maintain in the margin account after the purchase, falling below this means a margin call takes place to liquidate investors positions until the requirement is satisfied

Question 11

Margin Call

Answer 11

Occurs when the value of an investors margin account falls below the brokers required amount. They are demands for more capital to be added to meet the minimum maintenance margin, failing to do so will lead to liquidation to cover this cost

Question 12

Hedging with futures, buying something in the future

Answer 12

A company needs sell $200,000 in 6 months time for £, future rate is $1.40 / £ spot is $1.45. By taking out a futures contract they guarantee they can receive £s at a rate of $1.40/Pound and plan for that to happen, they are then protected from unfavourable exchange rates say $1.50/£

Question 13

Fuck this shit

Answer 13

IM OUT