Futures Markets And Contracts

Question 0

What causes futures and forwards to differ

Answer 0

Mark to market feature if futures

Question 1

No arbitrage price of futures contract

No storage costs or cash flows

Answer 1

FP = S0*(1+Rf)^T

Question 2

With positive correlation between underlying asset value and int rates,

Answer 2

Investors go long in futures contract

Futures price > forward

Question 3

No correlation between asset and int rates

Answer 3

Investors have no preference - forward/futures should be close to equal

Question 4

With negative correlation between underlying asset and int rate, investors

Answer 4

Go long forward contracts

Forward price > futures

Question 5

Since futures are marked to market daily, the contracts only have value…

Answer 5

During the trading day

Question 6

Value of futures contract

Answer 6

Contract value

= current futures price - futures price at last mark to market

Question 7

If futures contract is overpriced (futures market price > no arbitrage price), _________ will generate risk less profit

Answer 7

Cash and carry arbitrage

Question 8

How to execute cash and carry arbitrage

Answer 8

1. At initiation, borrow money for term at risk free rate
2. Buy underlying asset at spot price
3. Sell futures contract at current futures price
4. At expiration, deliver asset and receive futures price
5. Repay loan plus interest

Question 9

If futures contract is underpriced (futures market price < no arbitrage price), _________ will generate risk less profit

Answer 9

Reverse cash and carry arbitrage

Question 10

How to execute reverse cash and carry arbitrage

Answer 10

1. At initiation, sell asset short
2. Lend short sale proceeds at risk free rate
3. Buy futures contract at market price
4. Collect loan proceeds
5. Take delivery of asset for futures price and cover short sale

Question 11

What are examples of monetary and non monetary benefits and costs of holding assets

Answer 11

Storage and insurance (costs)
Cash flows (benefit)

Question 12

Calculate futures price with net monetary costs

Answer 12

FP = S0 * (1+Rf)^T + FV(NC)

Question 13

Calculate futures price with net non monetary benefits (convenience yield)

Answer 13

FP = S0 * (1+Rf)^T - FV(NB)

Question 14

What is backwardation

Answer 14

Futures price less than spot price

Question 15

Contango

Answer 15

Futures price is greater than spot price

Question 16

What is normal backwardation

Answer 16

Futures price is less than expected spot price to compensate futures buyers for taking on risk

Question 17

What is normal contango

Answer 17

Futures price is greater than expected spot price to reduce futures buyers’ future risk (to purchase asset)

Question 18

Why can’t Eurodollar futures be priced using standard no-arbitrage framework?

Answer 18

Eurodollar futures priced as discount yield
LIBOR- based deposits priced as add-on yield

Thus deposit not perfectly hedged by euro contract

Question 19

Price of treasury bond

Answer 19

CF (CTD bond)

CTD = cheapest to deliver

Question 20

Futures price of index

Answer 20

FP = S0 *(1+R)^T
——
(1 +8)^T

8 = discrete annual rate

Question 21

Futures price of index in continuous time

Answer 21

FP = S0e^(Rc-8c)^T

Question 22

What’s the diff between a regular index and a currency future price calculation?

Answer 22

Replace continuous rate with foreign rate