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Lecture Financial derivatives - Lecture 9: Mechanics of futures markets (con't)

The contents of this chapter include all of the following: Delivery, types of traders, types of orders, regulation of futures, accounting & tax, forward contracts vs futures contracts, difference between the operation of the margin accounts administered by a clearing house and those administered by a broker. | Lecture #09 If a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses. A few contracts (for example, those on stock indices and Eurodollars) are settled in cash Traders: Futures Commission merchants Locals Commission Broker Traders Speculators Scalpers: Hold positions for a few minutes Day traders: Hold positions for less than one day. Position traders: Hold positions for longer periods Hedgers Arbitrageurs Market Order: A trade be carried out immediately at the best price available in the market. Limit order: Specifies a particular price. If the limit price is $30 for an investor wanting to buy, the order will be executed at a price of $30 or less. Stop order (Stop loss order): Suppose a stop order to sell at $30 is issued when the market price is $35. It becomes an order to sell when and if the price falls to $30. Stop limit order: Two prices must be specified. Suppose that at a price of $35, a stop limit order to buy is issued with a stop price of $40 and a limit price of $41. Regulation is designed to protect the public interest Regulators try to prevent questionable trading practices by either individuals on the floor of the exchange or outside groups Ideally hedging profits (losses) should be recognized at the same time as the losses (profits) on the item being hedged Ideally profits and losses from speculation should be recognized on a mark-to-market basis Roughly speaking, this is what the accounting and tax treatment of futures in the U.S. and many other countries attempts to achieve Contract usually closed out Private contract between 2 parties Exchange traded Non-standard contract Standard contract Usually 1 specified delivery date Range of delivery dates Settled at end of contract Settled daily Delivery or | Lecture #09 If a futures contract is not closed out before maturity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses. A few contracts (for example, those on stock indices and Eurodollars) are settled in cash Traders: Futures Commission merchants Locals Commission Broker Traders Speculators Scalpers: Hold positions for a few minutes Day traders: Hold positions for less than one day. Position traders: Hold positions for longer periods Hedgers Arbitrageurs Market Order: A trade be carried out immediately at the best price available in the market. Limit order: Specifies a particular price. If the limit price is $30 for an investor wanting to buy, the order will be executed at a price of $30 or less. Stop order (Stop loss order): Suppose a stop order to sell at $30 is issued when the market price is $35. It .