Futures Flashcards
What are the problems with forwards?
Counterparties must check each other’s creditworthiness. Forward contracts are inherently credit instruments, and only people with good credit can use them. Additionally, forwards cannot be closed out prior to maturity easily.
What are financial futures?
Financial futures are available on a wide range of underlying assets, are exchange traded, and require specifications to be defined regarding what can be delivered, where, and when. They are settled daily.
How is a futures position closed out?
Closing out a futures position involves entering into an offsetting trade. Most contracts are closed out before maturity.
What happens if a futures contract is not closed out before maturity?
If a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. A few contracts are settled in cash.
Who are the usual users in the futures markets?
The usual types of users in derivatives markets are hedgers, arbitrageurs, and speculators.
What is the role of hedgers in the futures market?
Hedgers take an equal and opposite position in the futures market to their underlying exposures.
What do speculators do in the futures market?
Speculators do not have any matching exposures in the cash market.
What is the role of arbitrageurs in the futures market?
Arbitrageurs take positions in the spot/forward market and futures market if the price of the future does not reflect fair value.
What is a standardized contract in futures?
The contract size is a quantity of the foreign currency.
What is open interest?
Open interest is the total number of contracts outstanding, equal to the number of long positions or short positions.
What is the settlement price?
The settlement price is the price just before the final bell each day, used for daily settlement processes and margin requirement calculations.
What is the volume of trading?
The volume of trading refers to the number of trades in one day.
What is a margin requirement?
Margin is cash or marketable securities deposited by an investor with their broker. In the futures market, the counterparty is the futures clearing house, which minimizes default risk.
What is the purpose of a margin system in futures trading?
The margin system ensures that all participants in the market are creditworthy by requiring an initial margin and maintaining a maintenance margin.
What is basis risk?
Basis risk arises from the uncertainty about the basis when the hedge is closed out, as spot rates and futures might not move in the same direction.
