Futures Flashcards
Future contract
A contractual obligation in terms of which one party to the deal undertakes on T+0 to sell an asset at a price (determined on T+0) on a future date, and the other party undertakes to buy the same asset at the same price at the same price on the same future date.
Extended definition of a future contract
A standardized contract which obligates the buyer to accept delivery of, and the seller to deliver, a standardized quantity and quality of an asset at a pre-specified price on a pre-stipulated date in the future.
Expiry date
Date when delivery or cash settlement takes place.
Initial margin
A deposit required on futures deals that will ensure that the obligations under the contracts will be fulfilled.
Open interest
The number of outstanding contracts of a particular contract.
The number of contracts that are still open and obligated to deliver.
Convergence
As time in the life of a future goes by, the future price and the fair value price of the future converge on the spot price, and they are equal on the expiry date of the future.
Basis
Difference between the spot price and the future price.
Cost of carry
Difference between the fair value price and the spot price.
Participants in the futures market according to functionality
- Investors
- Arbitrageurs
- Hedgers
- Speculators
Investors
Investors in the futures market are those that view the futures market as an alternative to the cash market.
Arbitrageurs
Endeavour to profit from price differentials that exist in different markets on similar securities.
Role of arbitrageurs
They ensure that futures prices do not stray too far from the fair value prices an they add liquidity to the market.
Hedgers
Those are the participants that have exposure in the cash market and wish to reduce risk by taking the opposite position in the futures market.
Hedgers transfer risk to speculators.
Speculators
Those are the participants that endeavor to gain from the price movements in the futures market.
Hedging
The transferring of risk from the hedger (who has a portfolio or is awaiting a certain sum of cash), to some other party in the market (usually another hedger or a speculator).
Micro hedging
Each item on the balance sheet is valued separately and an autonomous hedge is set up for each item.
Macro hedging
The aggregate asset and/or liability portfolios are considered, and the overall risk is hedged in one operation.
Hedging horizon
A date on which the hedge will end.
Anticipatory hedge
Hedging a cash/spot position net yet taken.
Cash hedge
Hedging an existing position in the cash/spot market.
Long Hedge
Buying futures.