Topic 6 Futures markets Flashcards
(21 cards)
What is the key difference between futures/forward contracts and options?
The holder of an option is not compelled to buy or sell, whereas futures and forward contracts obligate the holder to go through with the transaction.
What is a forward contract?
A forward contract is a private agreement between two parties to buy or sell a specific asset at a specified price and date in the future.
What is a futures contract?
A futures contract is a standardized agreement to buy or sell an asset at a specific price and date in the future, traded on an organized public exchange.
What type of contracts are traded on futures exchanges?
Standardized contracts, such as commodity futures and financial futures.
What are examples of commodity futures?
Corn, wheat, coffee, soybeans, crude oil, natural gas, electricity, gold, silver, nickel, cobalt.
What are financial futures?
Futures contracts for equities, bonds, equity indexes, foreign exchange (FX), and interest rates.
What does taking a long position in a futures contract mean?
It means the trader commits to purchasing the asset on the delivery date.
What does taking a short position in a futures contract mean?
It means the trader commits to delivering the asset at the contract’s maturity.
How is profit calculated for a long futures position?
Profit is the difference between the spot price at maturity and the original futures price.
How is profit calculated for a short futures position?
Profit is the difference between the original futures price and the spot price at maturity.
What is the zero-sum game in futures trading?
In futures trading, gains and losses net out to zero, meaning one trader’s gain is the other’s loss.
What happens if the spot price equals the original futures price at maturity?
Profit is zero for both long and short positions.
Can the payoff of a long futures position be negative?
Yes, the payoff can be negative if the spot price falls below the original futures price.
How is most futures trading conducted?
Most futures trading is conducted through electronic networks rather than physical trading floors.
What role does a clearinghouse play in futures trading?
The clearinghouse acts as the buyer for the short position and the seller for the long position, ensuring a zero-net position.
What is open interest in futures contracts?
Open interest is the number of contracts outstanding in the market at any given time.
What happens to most futures contracts before delivery?
Most futures contracts are closed out by reversing the trade, meaning they are offset by an opposite transaction.
What percentage of futures contracts result in actual delivery?
Only 1-3% of futures contracts result in actual delivery of the underlying asset.
What is marking to market in futures trading?
Marking to market refers to the daily settlement of obligations on futures positions.
What is a margin call in futures trading?
A margin call occurs when a trader’s margin falls below the maintenance margin and requires the trader to deposit additional funds.
What is maintenance margin in futures trading?
The maintenance margin is the minimum value below which a trader’s margin balance may not fall, triggering a margin call.
