File Name: options futures and other derivatives markets.zip
The trading volume during a certain period of time is the number of contracts traded during this period. Problem 2. What is the difference between a local and a futures commission merchant? A futures commission merchant trades on behalf of a client and charges a commission. A local trades on his or her own behalf. The size of the contract is 5, ounces. What change in the futures price will lead to a margin call?
What happens if you do not meet the margin call? If the margin call is not met, your broker closes out your position. Suppose that in September a company takes a long position in a contract on May crude oil futures. It closes out its position in March One contract is for the delivery of 1, barrels.
When is it realized? How is it taxed if it is a a hedger and b a speculator? Assume that the company has a December 31 year-end.
When might it be used? It could be used to limit the losses from an existing long position. What is the difference between the operation of the margin accounts administered by a clearing house and those administered by a broker? The margin account administered by the clearing house is marked to market daily, and the clearing house member is required to bring the account back up to the prescribed level daily.
The margin account administered by the broker is also marked to market daily. However, the account does not have to be brought up to the initial margin level on a daily basis.
It has to be brought up to the initial margin level when the balance in the account falls below the maintenance margin level. What differences exist in the way prices are quoted in the foreign exchange futures market, the foreign exchange spot market, and the foreign exchange forward market?
In futures markets, prices are quoted as the number of U. Spot and forward rates are quoted in this way for the British pound, euro, Australian dollar, and New Zealand dollar. For other major currencies, spot and forward rates are quoted as the number of units of foreign currency per U. The party with a short position in a futures contract sometimes has options as to the precise asset that will be delivered, where delivery will take place, when delivery will take place, and so on.
Do these options increase or decrease the futures price? Explain your reasoning. These options make the contract less attractive to the party with the long position and more attractive to the party with the short position.
They therefore tend to reduce the futures price. What are the most important aspects of the design of a new futures contract? The most important aspects of the design of a new futures contract are the specification of the underlying asset, the size of the contract, the delivery arrangements, and the delivery months.
Explain how margin accounts protect futures traders against the possibility of default. Margin is money deposited by a trader with his or her broker. It acts as a guarantee that the trader can cover any losses on the futures contract. The balance in the margin account is adjusted daily to reflect gains and losses on the futures contract.
If losses lead to the balance in the margin account falling below a certain level, the trader is required to deposit a further margin. This system makes it unlikely that the trader will default. A trader buys two July futures contracts on frozen orange juice concentrate.
Each contract is for the delivery of 15, pounds. What price change would lead to a margin call? This happens if the futures price of frozen orange juice falls by more than 10 cents to below cents per pound. This will happen if the futures price rises by 6.
Show that, if the futures price of a commodity is greater than the spot price during the delivery period, then there is an arbitrage opportunity. Does an arbitrage opportunity exist if the futures price is less than the spot price? Explain your answer. If the futures price is greater than the spot price during the delivery period, an arbitrageur buys the asset, shorts a futures contract, and makes delivery for an immediate profit.
If the futures price is less than the spot price during the delivery period, there is no similar perfect arbitrage strategy. An arbitrageur can take a long futures position but cannot force immediate delivery of the asset.
The decision on when delivery will be made is made by the party with the short position. Nevertheless companies interested in acquiring the asset may find it attractive to enter into a long futures contract and wait for delivery to be made.
Explain the difference between a market-if-touched order and a stop order. A market-if-touched order is executed at the best available price after a trade occurs at a specified price or at a price more favorable than the specified price. A stop order is executed at the best available price after there is a bid or offer at the specified price or at a price less favorable than the specified price.
Explain what a stop-limit order to sell at A stop-limit order to sell at How much does the member have to add to its margin account with the exchange clearing house? Explain why collateral requirements will increase in the OTC market as a result of new regulations introduced since the credit crisis. These have initial and variation margin requirements similar to exchanges. There is also a requirement that initial and variation margin be provided for most bilaterally cleared OTC transactions between financial institutions.
As more transactions go through CCPs there will more netting. Transactions with counterparty A can be netted against transactions with counterparty B providing both are cleared through the same CCP.
This will tend to offset the increase in collateral somewhat. However, it is expected that on balance there will be collateral increases. The forward price on the Swiss franc for delivery in 45 days is quoted as 1. The futures price for a contract that will be delivered in 45 days is 0. Explain these two quotes. Which is more favorable for a trader wanting to sell Swiss francs? The 1. The 0. The Swiss franc is therefore more valuable in the forward market than in the futures market.
The forward market is therefore more attractive for a trader wanting to sell Swiss francs. Suppose you call your broker and issue instructions to sell one July hogs contract. Describe what happens. Live hog futures are traded by the CME Group. The broker will request some initial margin. It will then be sent by messenger to a commission broker who will execute the trade according to your instructions.
Confirmation of the trade eventually reaches you. If there are adverse movements in the futures price your broker may contact you to request additional margin. It is not in the public interest to allow speculators to trade on a futures exchange. Speculators are important market participants because they add liquidity to the market. However, regulators generally only approve contracts when they are likely to be of interest to hedgers as well as speculators. Explain the difference between bilateral and central clearing for OTC derivatives.
In bilateral clearing the two sides enter into a master agreement covering all outstanding transactions. The agreement defines the circumstances under which transactions can be closed out by one side, how transactions will be valued if there is a close out, how the collateral required by each side is calculated, and so on. In central clearing a CCP stands between the two sides in the same way that an exchange clearing house stands between two sides for transactions entered into on an exchange.
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Hull, Fundamentals of Futures and Options Markets, Fourth Edition. Hull, Options, Futures, and Other Derivatives, Fifth Edition. Risk Management/Financial.
As recognized, experience and also encounter concerning driving lesson, amusement, as well as understanding can be obtained by just checking out a publication Options, Futures, And Other Derivatives 10th Edition By John C.
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Maple Financial Group Professor of Derivatives and Risk Management Mechanics of options markets. Major exchanges trading futures and options.
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. Hull Published Economics. Contents: Introduction. Futures Markets and the Use of Futures for Hedging.
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Hull, John. Options, futures, and other derivatives / John C. Hull, University of Toronto. Interest rate derivatives: The standard market models.