42 lines
2.2 KiB
Plaintext
42 lines
2.2 KiB
Plaintext
702 Part V: Index Options and Futures
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More will be said later about the TED spread when the application of futures
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options to intermarket spreads is discussed. Since there is a liquid option market on
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both futures, it is sometimes more logical to establish the spread using options
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instead of futures.
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One other comment should be made regarding the TED spread: It has carry
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ing cost. That is, if one buys the spread and holds it, the spread will shrink as time
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passes, causing a small loss to the holder. When interest rates are low, the carrying
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cost is small (about 0.05 for 3 months). It would be larger if short-term rates rose.
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The prices in Table 35-1 show that the spread is more costly for longer-term con
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tracts.
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TABLE 35-1.
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Carrying costs of the TED spread.
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Month T-Bill Future
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March 96.27
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June 96.15
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September 95.90
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Eurodollar Future
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95.86
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95.69
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95.39
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TED Spread
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0.41
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0.46
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0.51
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Many intermarket spreads have some sort of carrying cost built into them; the
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spreader should be aware of that fact, for it may figure into his profitability.
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One final, and more complex, example of an intermarket spread is the crack
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spread. There are two major areas in which a basic commodity is traded, as well as
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two of its products: crude oil, unleaded gasoline, and heating oil; or soybeans, soy
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bean oil, and soybean meal. A crack spread involves trading all three - the base com
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modity and both byproducts.
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Example: The crack spread in oil consists of buying two futures contracts for crude
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oil and selling one contract each for heating oil and unleaded gasoline.
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The units of trading are not the same for all three. The crude oil future is a con
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tract for 1,000 barrels of oil; it is traded in units of dollars per barrel, so a $1 increase
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in oil prices from $18.00 to $19.00, say - is worth $1,000 to the futures contract.
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Heating oil and unleaded gasoline futures contracts have similar terms, but they are
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different from crude oil. Each of these futures is for 42,000 gallons of the product,
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and they are traded in cents. So, a one-cent move - gasoline going from 60 cents a
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gallon to 61 cents a gallon - is worth $420. This information is summarized in Table
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35-2 by showing how much a unit change in price is worth. |