Chapter 4 - Using Futures Markets Flashcards
due to collective opinion from many buyers & sellers, futures market are used to reveal info about expected future spot prices. This serves society in what way?
Price Discovery
3 different ways of futures markets uses? (D,S,H)
- Price Discovery
- Speculation
- Hedging
Price discovery and usefulness of price forecasts based on futures prices depend on what 3 factors?
- Need of Information
- Accuracy
- Performance: in relation with alternative forecasting techniques
A trader entering futures market in search of profit and WILLINGLY accepts increased risk, and trades beyond one’s own need is called what?
Speculator
What are 3 kinds of speculators?
- Scalpers
- Day Traders
- Position Traders
Shortest-term speculators? trades very frequently, and provide market liquidity the most?
Scalpers
4 Services influenced by scalpers? Acronym (O,A,C,H)
- Provide opposite side party to trading
- Active trading for efficient & effective discovery prices
- Increasing competition, narrowing bid-ask spreads
- Attract hedging activity
____ traders try to profit from trades within a single trading day, and have no position overnight in futures market.
Day
____ trader is a speculator maintaing a futures position OVERNIGHT or longer (sometimes weeks or months).
Position
What are the 2 types of position traders?
- Outright position
2. Spread position
what kind of speculator simply takes a NAKED position in a commodity and doesn’t hedge against risk. outright buy certain position in stocks or derivatives without counterprotection.
Outright position
what speculative _____ positions involve trading multiple contracts on same/related commodities to reduce risk?
Spread
_____ spread involve differences btw 2 or more contract maturities for SAME underlying good.
intrAcommodity
_____ spread are price differences btw 2 or more contracts for DIFFERENT/RELATED underlying goodS. (i.e. corn & wheat)
intErcommodity
What analysis is a method of analyzing markets that uses only market data such as prices, volume, open interests, and similar information to predict future price movements?
Technical Analysis
What’s is very similar and very much like mutual fund, but for futures market?
Commodity fund/pool
____ is a trader who enters the futures market in order to reduce a preexisting risk
hedger
A __________ hedge is purchasing a futures contract in anticipation of needing a commodity at a future date.
anticipatory
a _________ is needed when spot and futures positions do not match perfectly. there aren’t futures contracts available that is an exact match to needs.
cross-hedge
3 mismatches that make cross-hedge valuable
- Maturity
- Quantity
- Quality
what ratio calculates the number of futures contracts to hold for a given position in a commodity
Hedge Ratio
State the Hedge Rato formula
HR = - (futures position / cash market position)
what type of risk is faced when the size of futures position hedged is not matched to previous expectation of the commodity sized due to influencing factors out of farmer’s control?
quantity risk
what are 6 market imperfections that make hedging attractive and oftentimes necessary, yet also may impose real costs to firms?
- Taxes
- Costs of financial distress
- Transaction costs of hedging
- Principal-agent problems
- Costliness of diversification
- Differences btw internal & external financing costs
4 costs associated with bankruptcy and financial disress
- accountant & lawyer fees
- loss of customers
- exit of lines of business (other businesses back out of deals)
- loss of tax shields
