35 lines
2.5 KiB
Plaintext
35 lines
2.5 KiB
Plaintext
Cl,apter 34: Futures and Futures Options 6S3
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are traded in order to receive complete details. However, whenever examples are
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used, full details of the contracts used in those examples are given.
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FUTURES CONTRACTS
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Before getting into options on futures, a few words about futures contracts them
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selves may prove beneficial. Recall that a futures contract is a standardized contract
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calling for the delivery of a specified quantity of a certain commodity at some future
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time. Future contracts are listed on a wide variety of commodities and financial
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instruments. In some cases, one must make or take delivery of a specific quantity of
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a physical commodity (50,000 bushels of soybeans, for example). These are known as
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futures on physicals. In others, the futures settle for cash as do the S&P 500 Index
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futures described in a previous chapter; there are other futures that have this same
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feature (Eurodollar time deposits, for example). These types of futures are cash
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based, or cash settlement, futures.
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In terms of total numbers of contracts listed on the various exchanges, the more
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common type of futures contract is one with a physical commodity underlying it.
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These are sometimes broken down into subcategories, such as agricultural futures
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(those on soybeans, oats, coffee, or orange juice) and financial futures (those on U.S.
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Treasury bonds, bills, and notes).
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Traders not familiar with futures sometimes get them confused with options.
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There really is very little resemblance between futures and options. Think of futures
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as stock with an expiration date.
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That is, futures contracts can rise dramatically in price and can fall all the way
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to nearly zero (theoretically), just as the price of a stock can. Thus, there is great
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potential for risk. Conversely, with ownership of an option, risk is limited. The only
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real similarity between futures and options is that both have an expiration date. In
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reality, futures behave much like stock, and the novice should understand that con
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cept before moving on.
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HEDGING
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The primary economic function of futures markets is hedging - taking a futures
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position to offset the risk of actually owning the physical commodity. The physical
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commodity or financial instrument is known as the "cash." For index futures, this
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hedging was designed to remove the risk from owning stocks (the "cash market" that
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underlies index futures). A portfolio manager who owned a large quantity of stocks
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could sell index futures against the stock to remove much of the price risk of that |