52 lines
3.2 KiB
Plaintext
52 lines
3.2 KiB
Plaintext
282
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A Complete Guide to the Futures mArket
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So, for example, the weightings of the March and June quotes that would be used to derive a
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100day forward quote on March 2 would be as follows:
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Weighting for March quot e
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Weighting for
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= −
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− =1031 00
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103 12
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3
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91
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JJune quote = −
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− =100 12
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103 12
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88
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91
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As we move forward in time, the nearer contract is weighted less and less, but the weighting for
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the subsequent contract increases proportionately. When the number of days remaining until the
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expiration of the forward contract equals the constant forward time (100 days in this example), the
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quote for the constant forward series would simply be equal to the quote for the forward contract
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(June). Subsequent price quotes would then be based on a weighted average of the June and Septem
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ber prices. In this manner, one continuous price series could be derived.
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The constant
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forward price series eliminates the problem of huge price gaps at rollover points and
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is certainly a significant improvement over a nearest futures price series. However, this type of series
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still has major drawbacks. T o begin, it must be stressed that one cannot literally trade a constant
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forward series, since the series does not correspond to any real contract. An even more serious
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deficiency of the constant
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forward series is that it fails to reflect the effect of the evaporation of time
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that exists in actual futures contracts. This deficiency can lead to major distortions—particularly in
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carrying
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charge markets.
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T o illustrate this point, consider a hypothetical situation in which spot gold prices remain stable at
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approximately $1,200/ounce for a oneyear period, while forward futures maintain a constant pre
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mium of 1 percent per twomonth spread. given these assumptions, futures would experience a steady
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downtrend, declining $73.82/ounce1 ($7,382 per contract) over the oneyear period (the equivalent
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of the cumulative carryingcharge premiums). Note, however, the constantforward series would com
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pletely fail to reflect this bear trend because it would register an approximate constant price. For
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example, a two
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month constantforward series would remain stable at approximately $1,212/ounce
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(1.01 × $1,200 = $1,212). Thus, the price pattern of a constant forward series can easily deviate
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substantially from the pattern exhibited by the actual traded contracts—a highly undesirable feature.
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■ Continuous (Spread-Adjusted) Price Series
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The spreadadjusted futures series, commonly known as continuous futures, is constructed to elimi
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nate the distortions caused by the price gaps between consecutive futures contracts at their transi
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tion points. In effect, the continuous futures price will precisely reflect the fluctuations of a futures
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position that is continuously rolled over to the subsequent contract N days before the last trading
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day, where N is a parameter that needs to be defined. If constructing their own continuous futures
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data series, traders should select a value of N that corresponds to their actual trading practices.
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1 This is true since, given the assumptions, the oneyear forward futures price would be approximately $1,273.82
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(1.016 × $1,200 = $1,273.82) and would decline to the spot price ($1,200) by expiration. |