Chapter 12 Flashcards
Strategies Using Futures Contracts
Interest rate futures & stock index futures
Interest rate futures contract
on multiple bonds:
T-bills, T-notes, T-bonds, Federal Funds
Stock index futures
Dow, S&P 500, NASDAQ 100
Hedging
A person who takes a position in commodity for business reasons. Replacing price risk with basis risk.
Basis = cash price - futures mkt price
In a perfect hedge the basis will not change.
Basis risk = risk the basis will change
A hedge will be successful if the basis risk is less than the price risk.
Does the futures market have a daily price limit?
Rules established by futures exchange for a maximum range of price movement permitted between settle price of precious day and opening price of the next days trading.
Mark-to-Market
In a futures contract both parties put up earnest money between 5-15%.
Mark to the market - If the clearing house is concerned about someone getting out of a contract they will require more earnest money. This ensures that as prices fluctuate, the amount held in a margin account remains sufficient to meet minimum requirements.
Futures Clearing House guarantee’s the contracts are enforced?
True
Long Transaction vs Short Transaction
Long = order to buy
Short - order to sell
Futures Scalper
Scalper - Someone who holds a position in the futures market for a very short time. 30-60 seconds. Add a lot of liquidity to the mkt. Works off low margins.
Futures Hedger
Hedger - Needs a position for a business reason.
Futures Position Traders
Position Traders - Holds positions for a long period of time.
SPOT Market
Buyer and seller to agree price, quantity and what to trade. Delivery is at a later date.
On the spot transactions.
