7 - Intro to Futures Markets

Question 1

what are futures?

Answer 1

a contract that provides the buyer with a specific quantity of underlying asset at a future date for a specified price

Question 2

what is a key difference between futures and options?

Answer 2

both parties have an obligation

theres no right to walk away

Question 3

what is a forwards contract and what are the risks (3) it is prone to and why?

Answer 3

forward contract is a specific contract between two specific parties for the delivery of an asset at a future point in time for a price that is agreed today.

prone to default, credit and liquidity (unique arrangements) risk
because it is an over the counted contract

Question 4

why are futures considered safer than forward contracts? 3

Answer 4

• standardised terms and conditions
• traded on an organised exchange
• have daily settlement procedures (losses settled each day)

Question 5

which has been around longer? futures or forwards?

Answer 5

futures- 12th century

forwards- 1970’s backed by gold but when currencies began to float they were no longer back by commodities

Question 6

what is the role of clearing houses?

Answer 6

• act as an intermediary that records transactions
• covers risk exposure by requiring, initial and maintenance margins and marking accounts to market.
• netting efficiency i.e. total trades are netted through clearing house

Question 7

what is the initial margin and what is the maintenance margin? which one are you allowed to drop below on day to day trading?

Answer 7

initial margin- amount of money one must put up to take a position
maintenance margin - amount of money that you must maintain within your account.

can drop below initial margin but not maintenance making

Question 8

how are margins calculated?

Answer 8

using SPAN- standard portfolio analysis of risk

calculates 16 different risk scenarios

Question 9

what is meant by daily settlement? when do you receive a margin call?

Answer 9

marking to market daily

when your balance falls below maintenance margin you receive a margin call.
Additional funds must be provided to the clearing house?

Question 10

what are the two choices an investor has if he received a margin call?

Answer 10

• top up margin account within 2 days of margin call

- liquidate some of the contracts to that he meets the INITIAL MARGIN requirements

Question 11

delivery and cash settlement is set into motion two days before expiry, discuss the process

Answer 11

• Position of notice day (1)receive margin call: trader informs clearing house it intends to deliver
• Notice of intention day (2) clearing house contacts long to inform of delivery
• Delivery day - long pays and short delivers

Question 12

are most contracts settled?

Answer 12

no most contracts are not delivered, rather parties take offsetting positions prior to delivery

Question 13

are the trading costs of the futures market more or less than those of the equity market?

Answer 13

cheaper, also offers more liquidity

Question 14

when making trades how are trades prioritised?

Answer 14

by price and time priority bases

Question 15

SFE clearing co-opperation, handles which parts of the the trade?

Answer 15

• assessment of the participates credit worthiness
• registory for who own what
• handles margins
• establishes the rules

Question 16

if trades are made on a price and time priority bases, what does this mean?

Answer 16

the higher the bid the quicker the trade will be executed

Question 17

what is the futures trading platform owned by ASX?

Answer 17

Sydney Futures Exchange SFE

Question 18

what is the SPI 200? list 4 facts

Answer 18

premier index future in Australia
includes 200 leading stock, 
is highly liquid, 
88% market coverage, 
lots of info available

Question 19

what is the tax treatment for forward sales?

Answer 19

tax assessable when delivery is made

Question 20

what is the tax treatment for forward purchases?

Answer 20

tax deducible when delivery is made, unless deductions have not been deferred until delivery

Question 21

what is the tax treatment for fee, in regards to the purchaser and the seller?

Answer 21

purchaser - deductible

seller - assessable