37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
Chapter 34: Futures and Futures Options 679
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This will not work well near expiration, since the future expires one week prior to the
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PHLX option. In addition, it ignores the early exercise value of the PHLX options.
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However, except for these small differentials, the shortcut will give theoretical values
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that can be used in strategy-making decisions.
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Example: It is sometime in April and one desires to calculate the theoretical values
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of the June deutsche mark physical delivery options in Philadelphia. Assume that one
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knows four of the basic items necessary for input to the Black-Scholes formula: 60
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days to expiration, strike price of 68, interest rate of 10%, and volatility of 18%. But
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what should be used as the price of the underlying deutsche mark? Merely use the
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price of the June deutsche mark futures contract in Chicago.
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STRATEGIES REGARDING TRADING LIMITS
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The fact that trading limits exist in most futures contracts could be detrimental to
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both option buyers and option writers. At other times, however, the trading limit may
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present a unique opportunity. The following section focuses on who might benefit
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from trading limits in futures and who would not..
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Recall that a trading limit in a futures contract limits the absolute number of
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points that the contract can trade up or down from the previous close. Thus, if the
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trading limit in T-bonds is 3 points and they closed last night at 7 421132, then the high
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est they can trade on the next day is 7721132, regardless of what might be happening
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in the cash bond market. Trading limits exist in many futures contracts in order to
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help ensure that the market cannot be manipulated by someone forcing the price to
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move tremendously in one direction or the other. Another reason for having trading
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limits is ostensibly to allow only a fixed move, approximately equal to the amount cov
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ered by the initial margin, so that maintenance margin can be collected if need be.
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However, limits have been applied in case~which they are unnecessary. For exam
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ple, in T-bonds, there is too much liquidity for anyone to be able to manipulate the
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market. Moreover, it is relatively easy to arbitrage the T-bond futures contract against
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cash bonds. This also increases liquidity and would keep the future from trading at a
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price substantially different from its theoretical value.
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Sometimes the markets actually need to move far quickly and cannot because of
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the trading limit. Perhaps cash bonds have rallied 4 points, when the limit is 3 points.
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This makes no difference when a futures contract has risen as high as it can go for
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the day, it is bid there (a situation called "limit bid") and usually doesn't trade again
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as long as the underlying commodity moves higher. It is, of course, possible for a
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future to be limit bid, only to find that later in the day, the underlying commodity
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becomes weaker, and traders begin to sell the future, driving it down off the limit. |