Add training workflow, datasets, and runbook
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700 Part V: Index Options and Futures
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occurred. While it is unlikely that the spread would actually widen to historic highs,
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it is certainly possible that it could widen 25 or 30 cents, a profit of $1,250 to $1,500.
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That is certainly high leverage on a $500 investment over a short time period,
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so one must classify spreading as a risk strategy.
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INTERMARKET FUTURES SPREADS
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Another type of futures spread is one in which one buys futures contracts in one mar
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ket and sells futures contracts in another, probably related, market. When the futures
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spread is transacted in two different markets, it is known as an intermarket spread.
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Intermarket spreads are just as popular as intramarket spreads.
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One type of intermarket spread involves directly related markets. Examples
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include spreads between currency futures on two different international currencies;
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between financial futures on two different bond, note, or bill contracts; or between a
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commodity and its products - oil, unleaded gasoline, and heating oil, for example.
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Example: Interest rates have been low in both the United States and Japan. As a
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result, both currencies are depressed with respect to the European currencies, where
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interest rates remain high. A trader believes that interest rates will become more uni
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form worldwide, causing the Japanese yen to appreciate with respect to the German
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mark.
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However, since he is not sure whether Japanese rates will move up or German
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rates will move down, he is reluctant to take an outright position in either currency.
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Rather, he decides to utilize an intermarket spread to implement his trading idea.
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Assume he establishes the spread at the following prices:
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Buy I June yen future: 77.00
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Sell I June mark future: 60.00
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This is an initial differential of 17.00 between the two currency futures. He is
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hoping for the differential to get larger. The dollar trading terms are the same for
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both futures: One point of movement (from 60.00 to 61.00, for example) is worth
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$1,250. His profit and loss potential would therefore be:
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Spread Differential
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al a Later Date Profit/Loss
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14.00 $3,750
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16.00 - $1,250
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18.00 + 1,250
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20.00 + 3,750
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