Futures, forward Flashcards
What is the purpose of the futures exchange?
acts as an intermediary and mitigate the risk of default by either party in the intervening period.
How does the futures exchange protect from default?
ask both parties to put up some initial cash: the original margin
What is the original margin?
a % of the value of the futures contract and varies depending on the volatility of the market. The more volatile, the higher the margin.
What is leverage?
the fact that original margins are a small pc of the value of the underlying commodity means you can trade really big with little money.
a contract delivered is…
a contract sold
a contract liquidated…
is a contract bought back
what is variation margins
the price variations of a commodity’s price from the moment the contract is entered into and to the moment it is delievered or liquidated.
How does the futures exchange protect against default?
They ask shorts to pay equiv losses if the price goes up and longs to pay equiv of losses if price goes down - every day
Positive and negative of using futures market?
no risk that the supplier will default due to bankruptcy etc, BUT no assurance of where you get the commodity from.
What’s an EEP and AA?
Exchange for Physicals (EFP) Against Actuals (AA) transaction. When you hedge your price risk by buying futures and then nearer the date of shipment you exchange the futures contracts for actual sugar.
Why is selling commodities on the futures exchange good for farmers not sure about harvest?
They can buy back futures they have sold in case of a problem (even if its not a price they would like)
Most traders expertise is not in the outright price…
but in the basis - the physical difference between physicals and futures.
How does a trader trade the physical premium?
if you buy physical cargoes on an EFP against the futures in expectation the premiums/ basis would rise
Jargon way of saying only brazillian sugar will be delivered
the futures represent brazillian origin
the information itself isn’t important…
but the way it’s acted upon
a spot contract is…
a contract between two parties where delivery of a specific commodity takes place immediately (on the spot) or, in most cases, within the next few days.
a forward contract…
is a contract between two parties where delivery of a specific commodity takes place at a time and price that is determined today.
how is a forward contract similar to a futures contract?
A forward contract is like a futures contract in that it specifies the exchange of goods for a specified price at a specified future date
how is forward contract different to futures contract?
However, a forward is not traded on an exchange and thus does not have the interim partial payments or margins (see below) when the contract is marked to market. Nor is the contract standardised, as on the exchange. All terms have to be negotiated separately.
Both spot and forward contracts referring to contracts for the physical commodity.
cash contracts.
Markets for physical contracts are sometimes referred to as….
cash markets
A futures contract is a contract to
….buy or sell a commodity (or other underlying asset) for delivery and payment on a future date at a price specified today.
where are futures negotiated?
a futures exchange, which acts as an intermediary between buyer and seller.
the buyer of the contract is said to be …
long
the seller of the contract is said to be…
short
What is the bid/offer - is a translation of..?
what price is the buyer bidding and what price is the seller offering?
What is the difference between the price that is bid and asked?
the bid/offer spread
What was the first legal code?
the code of hammurabi - 1750 BC
What did the code of hammurabi allow
alowed goods to be sold for an agreed price for delivery at a future date.
the code of hammurabi was the first example of…
derivatives in the form of future/forward contracts. Trading done in temples
