.. slideconf:: ============================================================================== Futures Markets ============================================================================== Futures Contracts ============================================================================== Futures contracts are forward contracts with the following differences: .. raw:: - They are *exchange traded*. .. raw:: - The contract is standardized (by the exchange). .. raw:: - They are settled daily. Role of Exchanges ============================================================================== Exchanged are centralized locations with the following features: .. raw:: - They standardize contracts. .. raw:: - They aggregate supply and demand. .. raw:: - They determine limitations on who can trade and how. .. raw:: - They set limitations on borrowing and distribute risk by requiring transactions to be routed through clearing houses. Exchanges ============================================================================== `Major futures exchanges `_ at present: .. raw:: - `CME Group `_. .. raw:: - `Intercontinental Exchange (ICE) `_. .. raw:: - `Eurex `_. .. raw:: - `National Stock Exchange of India `_. Contract Specifications ============================================================================== The futures exchange determines the following aspects of contracts: .. raw:: - Price units. .. raw:: - Price increments. .. raw:: - Size units. .. raw:: - When the contract trades. .. raw:: - When the contract is settled. .. raw:: - How the contract is settled. .. raw:: - Margin. Example: E-mini S\&P 500 Contract ============================================================================== The `E-mini S\&P 500 futures contract `_ is a contract on the S\&P 500 index. .. raw:: - Note that the S\&P 500 is simply an index, not a traded asset. .. raw:: - The price of the E-mini is quoted in S\&P 500 index points. .. raw:: - The actual size of the contract is 50x the index. .. raw:: - Margin for a single contract is \$5060. E-mini S\&P 500 Specifications ============================================================================== .. image:: Futures/eminiSpecs1.png :width: 6in :align: center E-mini S\&P 500 Specifications ============================================================================== .. image:: Futures/eminiSpecs2.png :width: 6in :align: center Futures Maturities ============================================================================== Note that many futures contracts with different maturities on the same underlying can exist at the same time. .. raw:: - For example, E-mini contracts expire on the third Friday of each Mar/Jun/Sep/Dec. .. raw:: - At any date, the next five contracts are available for trade. .. raw:: - The contract closest to expiry is called the *front-month* contract and is always the most liquid. Delivery of Commodities ============================================================================== For commodities, delivery is an important part of the specification. .. raw:: - What type (grade) of the product can be delivered. .. raw:: - Range of dates for delivery. Terminology ============================================================================== - **Open interest**: Total number of contracts outstanding. .. raw:: - **Trade volume**: The number of contracts traded. .. raw:: - **Settlement price**: The last price before market close. .. raw:: Volume vs. Open Interest ============================================================================== - What is the difference between open interest and trade volume on a given day? .. raw:: - When are trade occurs, what are the possible effects on open interest? .. raw:: - Can trade volume be greater than open interest during day? Margin ============================================================================== When investors borrow money from a broker to purchase an asset, they are `buying on margin `_. .. raw:: - The *initial margin* is cash or marketable securities that an investor gives to a broker in order to purchase an asset. .. raw:: - The purchased securities are maintained in an account by the broker and are monitored. - Gains and losses on the securities are added to the value of the account. .. raw:: - The maintenance margin is a lower threshold for the value of the account. - When the value falls below, the investor must add cash or securities up to initial margin. .. raw:: - Margin accounts are typically settled daily. E-mini Margin ============================================================================== For the E-mini: .. raw:: - Initial margin is \$5225. .. raw:: - Maintenance margin is \$4750. .. raw:: - The settlement price on 6 April 2016 was 2060.25, or a notional value of 50x2060.25 = \$103012.5. - This implies a leverage ratio of :math:`\smash{\frac{103012.5}{5225} = 19.71}` Example: Gold Futures ============================================================================== Suppose that an investor buys two CME Group gold futures contracts (symbol `GC `_) for \$1450 (per troy ounce). .. raw:: - Initially margin is \$6000 per contract. .. raw:: - Maintenance margin is \$4500 per contract. .. raw:: - The contract size is 100 troy ounces, which implies a notional value of 1450*100 = \$145,000. .. raw:: - The resulting leverage ratio is :math:`\smash{\frac{145000}{6000} = 24.17}`. Example: Gold Futures ============================================================================== .. image:: Futures/marginFlows.png :width: 7.5in :align: center .. Futures vs. Forwards .. ============================================================================== .. ==================================== ======================== .. Forwards Futures .. ==================================== ======================== .. Private contract between two parties Exchange traded .. Non-standard contract Standard contract .. Usually one specified delivery date Range of delivery dates .. Settled at end of contract Settled daily .. Delivery usually occurs Usually closed out early .. Some credit risk Virtually no credit risk .. ==================================== ========================