Future Markets

Question 1

Futures contract

Answer 1

An agreement to buy or sell a specified quantity of a specified asset on a specified future date at a price agreed today

Question 2

Which assets are possible to trade on the future markets

Answer 2

Almost any assets
•FX
•bonds
•stock indicted
•commodities

Question 3

CME group

Answer 3

• CME- Chicago Mercantile Exchange
• NYMEX- NY Mercantile Exchange
• COMEX- Commodity Exchange Incorporation
• CBOT- Chicago Board of Trade

Question 4

Front month

Answer 4

The nearest expiration date for a futures contract

Question 5

How are futures contracts written in code

Answer 5

Each month has a code e.g ECH19
EC= euro currency
H= March
19=2019

Some assets have just 4 contracts per year, others have 12

Question 6

Advantages of futures for speculation

Answer 6

• good liquidity and price availability
• no counterparty/ default risk
• leverage is allowed
• low commission rates
• long and short positions are allowed

Question 7

Disadvantages of futures for speculation

Answer 7

• only open to high net worth individuals
• trading platforms are expensive
• less leverage available then CFDs or spread betting
• larger margin requirements for individual trades
• for some assets, only full contracts can be traded (not minis)

Question 8

Advantages of futures for hedging

Answer 8

• oil producers, farmers etc can lock in prices for future delivery
• airlines can hedge against rises in fuel costs

Question 9

Disadvantages of futures for hedging

Answer 9

• fixed contract size- inflexible amount

* hedging may lose your money if prices move in the wrong direction

Question 10

Fair value

Answer 10

A theoretical value derived from the price of an asset

Question 11

Why are commodities’ future fair values usually higher than the underlying cash price?

Answer 11

Because when you buy commodities you have to store it and ensure it so you lose money in lost interest

Question 12

Equation for fair value

Answer 12

Fair value = cash price + cost of carry

Cost of carry includes
•delivery costs
•storage costs
•insurance costs
•lost interest

Question 13

Initial margin

Answer 13

A fixed amount per contract based on the likely maximum overnight movement in the contracts price that you must pay

Question 14

Equation for trading on margin

Answer 14

Total margin = initial margin + variation margin

Question 15

What hapens when you close out a margin trading deal?

Answer 15

The initial margin is refunded and the net profit or loss is realised