43 lines
3.1 KiB
Plaintext
43 lines
3.1 KiB
Plaintext
4
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A Complete Guide to the Futures mArket
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The essence of a futures market is in its name: Trading involves a commodity or financial
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instrument for a future delivery date, as opposed to the present time. Thus, if a cotton farmer
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wished to make a current sale, he would sell his crop in the local cash market. However, if the
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same farmer wanted to lock in a price for an anticipated future sale (e.g., the marketing of a still
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unharvested crop), he would have two options: He could locate an interested buyer and negotiate
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a contract specifying the price and other details (quantity, quality, delivery time, location, etc.).
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alternatively, he could sell futures. some of the major advantages of the latter approach are the
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following:
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1. The futures contract is standardized; hence, the farmer does not have to find a specific buyer.
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2. The transaction can be executed virtually instantaneously online.
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3. The cost of the trade (commissions) is minimal compared with the cost of an individualized
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forward contract.
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4. The farmer can offset his sale at any time between the original transaction date and the final
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trading day of the contract. The reasons this may be desirable are discussed later in this chapter.
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5. The futures contract is guaranteed by the exchange.
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Until the early 1970s, futures markets were restricted to commodities (e.g., wheat, sugar,
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copper, cattle). since that time, the futures area has expanded to incorporate additional market sec-
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tors, most significantly stock indexes, interest rates, and currencies (foreign exchange). The same
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basic principles apply to these financial futures markets. Trading quotes represent prices for a future
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expiration date rather than current market prices. For example, the quote for December 10-year
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T -note futures implies a specific price for a $100,000, 10-year U.
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s. Treasury note to be delivered
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in December. Financial markets have experienced spectacular growth since their introduction, and
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today trading volume in these contracts dwarfs that in commodities.
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nevertheless, futures markets
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are still commonly, albeit erroneously, referred to as commodity markets, and these terms are
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synonymous.
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■ Delivery
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shorts who maintain their positions in deliverable futures contracts after the last trading day
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are obligated to deliver the given commodity or financial instrument against the contract. similarly,
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longs who maintain their positions after the last trading day must accept delivery. in the com-
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modity markets, the number of open long contracts is always equal to the number of open short
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contracts (see section V olume and Open
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interest). Most traders have no intention of making
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or accepting delivery, and hence will offset their positions before the last trading day. (The
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long offsets his position by entering a sell order, the short by entering a buy order.)
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it has been
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estimated that fewer than 3 percent of open contracts actually result in delivery. some futures
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contracts (e.g., stock indexes, eurodollar) use a cash settlement process whereby outstanding long
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and short positions are offset at the prevailing price level at expiration instead of being physically
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delivered. |