Topic 6: Futures Markets Flashcards
(24 cards)
What is a futures contract?
A derivative obligating the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price.
What is a forward contract?
A private agreement between two parties to buy or sell an asset at a specified future date at a specified price.
How does an option differ from a futures contract?
An option gives the right but not the obligation, while a futures contract imposes an obligation.
Where are futures contracts traded?
On organized public exchanges.
Where are forward contracts traded?
Over-the-counter (OTC) between private parties.
What role does the clearinghouse play in futures markets?
Acts as the counterparty to both sides of a trade, reducing counterparty risk.
What is the meaning of a long position in futures?
An agreement to buy the underlying asset at contract maturity.
What is the meaning of a short position in futures?
An agreement to sell the underlying asset at contract maturity.
What does it mean that futures trading is a zero-sum game?
The gains and losses of the parties involved offset each other to net zero.
How is profit for a long futures position calculated?
Spot price at maturity minus the original futures price.
How is profit for a short futures position calculated?
Original futures price minus the spot price at maturity.
What is marking to market?
Daily adjustment of margin accounts based on changes in the futures price.
What is a maintenance margin?
The minimum account balance required to keep a futures position open.
What triggers a margin call?
When the account balance falls below the maintenance margin.
What is open interest in futures trading?
The number of outstanding contracts that have not been settled.
What is hedging in the futures market?
Using futures contracts to protect against price movements in an asset.
What is speculation in the futures market?
Taking futures positions to profit from expected price movements.
What is a long hedge?
A hedge to protect against rising prices by taking a long futures position.
What is a short hedge?
A hedge to protect against falling prices by taking a short futures position.
Give an example of a short hedge.
An oil distributor selling oil futures to protect against falling oil prices.
What is basis in futures trading?
The difference between the spot price and the futures price.
What is basis risk?
Risk that the basis does not converge to zero at contract maturity, resulting in imperfect hedging.
What can cause basis risk?
Mismatch in commodity type, quality, quantity, or delivery date.
Why did electricity producers face cash-flow problems despite rising prices in 2022?
Large margin calls on short futures positions before spot market gains were realized.
