TAILIEUCHUNG - Lecture Financial derivatives - Lecture 7: Mechanics of futures markets

The contents of this chapter include all of the following: Futures contracts, opening and closing futures position, specification of futures contracts, convergence of futures to spot, the operation of margins. | Lecture #07 Agreement to buy or sell an asset for a certain price at a certain time. Similar to forward contract but standardized. Whereas a forward contract is traded over-the-counter, a futures contract is traded on an exchange Specifications need to be defined: What can be delivered, Where it can be delivered, & When it can be delivered This is the time period during the delivery month when delivery can be made. Trading usually ends some time during the delivery period. The party with the short position chooses when delivery is made. However majorty of the futures contracts that are initiated do not lead to delivery. The reason is that most investors choose to close out their positions perior to the delivery period. Most contracts are closed out before maturity The Asset Contract size Delivery arrangements Delivery months Price Quotes Price limits & position limits Time Time (a) (b) Futures Price Futures Price Spot Price Spot Price A margin is cash or marketable securities deposited by an investor with his or her broker The balance in the margin account is adjusted to reflect daily settlement Margins minimize the possibility of a loss through a default on a contract

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