Chance/BrooksAn Introduction to Derivatives and Risk Management, 8th ed.Ch. 8: 1 Chapter 8: The Structure of Forward and Futures Markets Futures traders.
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Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 1
Chapter 8: The Structure of Forward and Futures Markets
Futures traders tend to be superstitious—when on a good Futures traders tend to be superstitious—when on a good run they are reluctant to change their mojo, this includes run they are reluctant to change their mojo, this includes washing their jackets. Traders will wear their lucky jackets washing their jackets. Traders will wear their lucky jackets until they fall apart or their luck runs out. Some traders until they fall apart or their luck runs out. Some traders have even been buried in their lucky jackets, reflecting a have even been buried in their lucky jackets, reflecting a hope that the good luck their jackets provided in the trading hope that the good luck their jackets provided in the trading pits on Earth could be retained for eternity in that Great pits on Earth could be retained for eternity in that Great Trading Pit in the sky.Trading Pit in the sky.
Jim OverdahlJim Overdahl
FuturesFutures Fall Special Issue 2005, p. 14 Fall Special Issue 2005, p. 14
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 2
Important Concepts in Chapter 8 Definitions and examples of forward and futures contractsDefinitions and examples of forward and futures contracts Institutional characteristics of forward and futures marketsInstitutional characteristics of forward and futures markets Futures contracts available for tradingFutures contracts available for trading Placing an order, margins, daily settlementPlacing an order, margins, daily settlement The role of the clearinghouseThe role of the clearinghouse Accessing futures price quotationsAccessing futures price quotations Magnitude and effects of transaction costsMagnitude and effects of transaction costs
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 3
Development of Forward and Futures Markets
Chicago Futures MarketsChicago Futures Markets Development of Financial FuturesDevelopment of Financial Futures Development of Options on Futures MarketsDevelopment of Options on Futures Markets Parallel Development of Over-the-Counter MarketsParallel Development of Over-the-Counter Markets
interbank marketinterbank market growth of forward marketsgrowth of forward markets
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 7
Futures Exchanges
See Table 8.1 for list of exchanges.See Table 8.1 for list of exchanges. Global and after-hours tradingGlobal and after-hours trading Estimated world-wide volume in 2007 was 7.0 billion Estimated world-wide volume in 2007 was 7.0 billion
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 10
Futures Traders (continued)
The Cost and Profitability of Exchange MembershipThe Cost and Profitability of Exchange Membership seatsseats See Figure 8.1 for history of CME seat prices.See Figure 8.1 for history of CME seat prices. leasing a seat at around 1.0 - 1.5 %/mo. of seat priceleasing a seat at around 1.0 - 1.5 %/mo. of seat price profitability of membershipprofitability of membership
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 12
Mechanics of Futures Trading (continued)
Daily SettlementDaily Settlement initial margininitial margin maintenance marginmaintenance margin concept of “margin” vs. performance bondconcept of “margin” vs. performance bond settlement pricesettlement price variation marginvariation margin See Table 8.2 for example.See Table 8.2 for example. open interestopen interest
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 13
Mechanics of Futures Trading (continued)
Delivery and Cash SettlementDelivery and Cash Settlement three-day delivery processthree-day delivery process alternative deliverable gradesalternative deliverable grades offsettingoffsetting exchange for physicalsexchange for physicals forward market proceduresforward market procedures
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 17
Regulation of Futures Markets
Regulation is nearly always at the federal level; e.g.,Regulation is nearly always at the federal level; e.g., Commodity Futures Trading Commission (U.S.)Commodity Futures Trading Commission (U.S.) Financial Services Authority (U.K.)Financial Services Authority (U.K.) Financial Services Agency (Japan)Financial Services Agency (Japan)
Objective of most federal regulationObjective of most federal regulation ensuring public information availableensuring public information available authorization and licensing of contracts and authorization and licensing of contracts and
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 18
Regulation of Futures Markets (continued)
Arbitration of disputes is sometimes done through the Arbitration of disputes is sometimes done through the federal government and the courts but often through self-federal government and the courts but often through self-regulatory organizations such as the National Futures regulatory organizations such as the National Futures Association in the U. S.Association in the U. S.
Note: Forward markets are regulated only indirectly and, Note: Forward markets are regulated only indirectly and, thus, are largely unregulated.thus, are largely unregulated.
Chance/Brooks An Introduction to Derivatives and Risk Management, 8th ed. Ch. 8: 20
Appendix 8: Taxation of Futures Contracts
Treated as 60 % capital gains and 40 % ordinary income.Treated as 60 % capital gains and 40 % ordinary income. Capital gains subject to 28 % maximum.Capital gains subject to 28 % maximum. Must be marked to market at year end.Must be marked to market at year end. New single stock futures are taxed the same as individual New single stock futures are taxed the same as individual
stocks.stocks. Hedge transactions covered in Chapter 11.Hedge transactions covered in Chapter 11.