Chapter 3 - Futures Prices Flashcards
_______ is the benefit or premium associated with holding the ACTUAL physical asset instead of the futures/forward/derivative asset. Usually because of high demand and scarcity at the same time. (it is when cost-of-carry model fails to apply when an asset has such)
Convenience Yield (p. 97 and investopedia)
also known as “backwardation” or backwarded market
Contango - refers to high storage costs and no dividends. (from lecture video)
Wikipedia says:
it is a situation where futures price of a commodity is higher than expected spot price; buyers willing to pay more ‘premium’ to avoid storage and other carrying costs.
the difference between the cash price (spot price) and the futures price of a commodity is called _____?
Basis
Example of what ____ yield? buy physical bales of wheat instead of futures contracts. a drought occurs and scarcity/demand rises, the difference of 1st purchase wheat price vs. after-shock price of the wheat.
Convenience Yield
price discrepancy for 2 futures contract expiration on SAME commodity
intrAcommodity spread
True or false:
Connection btw futures prices & expected future SPOT prices is so strong that some market observers believe that they must be or should be at least equal?
True
is when CURRENT spot price is more than future price; or when nearby futures price is more than the distant futures price.
(basically price appears to be falling the farther out)
Backwarded Market; Backwardation; (video lecture)
‘future is less than spot”
_____ is the total cost to carry (holding) an asset forward in time
Cost of Carry
Cost of Carry or Carrying Charge - consists 4 costs
- Storage
- Insurance
- Transportation
- Financing the item
* also, interest lost of funds tied up**
Arbitrage exists if:
it does NOT follow F = S + C of carry [ F = S(1 + C)]
Spot & Futures Parity (equal) Theory also referred to ____
Cost of Carry
What is the ONLY variable in a futures contract, which is “discovered” on the trading floor?
*not all commodity futures are quoted the same way (ie. cents, dollars, points, etc.)
Price
What is the starting value of forwards and futures?
Zero
the difference btw current cash price and the futures price for the SAME commodity is called what?
Basis
state the Basis formula
Basis = S - F
S = current spot or cash price F = current futures price
_____ in futures market (basis) here price for more distant futures are higher than nearby futures. In other words, prices rise the farther futures are away from spot
Normal Market (goes higher and higher)
____ is when distant futures prices are LOWER than nearby contract expiration. in other words, keeps on declining the further out in futures timeline.
Inverted Market (goes lower & lower)
what’s it called when futures prices approaches the spot price as delivery time approaches. basis narrows and must equal 0 (with exception to transportation/transaction costs) at maturity.
Convergence
______ is the difference in price btw 2 futures contracts with 2 different maturity dates on SAME commodity or asset.
Spread
says that the 2 strategies - purchase now/store it OR take long position in futures market - should have same market-determined costs. in other words, MUST EQUAL, no arbitrage possible.
Spot-Futures Parity Theorem (F = S + C)
‘ask price’
seller’s selling price
‘bid price’
buyer’s selling price
What 4 factors cause Cost-of-Carry Model to be imperfect markets?
- Direct transaction costs
- Unequal borrowing/lending rates
- Margin & restrictions on short selling
- Limitations to storage (rotting qualities)
_____ is what market participants expect the price of a commodity will be.
Expected Future Spot Price
what is ‘quasi-arbitrage’?
where all traders face different transaction cost (given his/her position as a dealer, broker, unknown, individual, etc) that may impact varying overall profit or loss.
_____ where futures contract price is lower than EXPECTED spot price at contract maturity. (but is when futures prices are increasing - good for long position speculators - investopedia)
Normal Backwardation
