Futures contract: a contract to buy or sell a stated commodity or financial claim at a specified price at some specified future time. Suppose a farmer plans to harvest 10,000 bushels of corn in 6 months. The current price is $ per bushel. The farmer sells a futures contract, which will allow him to sell corn at per bushel in 6 months. If the price of corn falls to $ per bushel, the farmer loses $5,000 ($ x 10,000 bushels) on his corn, but gains $5,000 on his futures contract | 2002, Prentice Hall, Inc. Ch. 21: Risk Management Innovations in Risk Management Futures contract: a contract to buy or sell a stated commodity or financial claim at a specified price at some specified future time. Futures: a simple example Suppose a farmer plans to harvest 10,000 bushels of corn in 6 months. The current price is $ per bushel. The farmer sells a futures contract, which will allow him to sell corn at per bushel in 6 months. If the price of corn falls to $ per bushel, the farmer loses $5,000 ($ x 10,000 bushels) on his corn, but gains $5,000 on his futures contract. Futures: a simple example If the price of corn rises to $ per bushel, the farmer gets $5,000 more for his corn, but loses $5,000 on the futures contract. The farmer has effectively locked in a price of $ per bushel and has hedged his risk. Futures Trading Requires: An Organized Exchange - the Chicago Board of Trade is the oldest and largest futures exchange. Standardized Contracts - for more frequent trades and greater liquidity. A Futures Clearinghouse - stands between all buyers and sellers to guarantee that all trades are honored. Daily Resettlement of Contracts - An initial margin of 3% to 10% of the contract’s value is paid up front. A maintenance margin is required. Any end-of-day losses must be replenished by the contract holder. Futures Trading Requires: Types of Futures Contracts Commodity Futures - agricultural commodities (corn, wheat, orange juice, etc.) as well as metals, wood products and fibers. Financial Futures - futures contracts on Treasury bills, notes and bonds, GNMAs, CDs, Eurodollars, foreign currencies, and stock indices. Financial Futures Interest Rate Futures - used to hedge risks associated with interest rate fluctuations. For example, Treasury bond futures may allow a firm to lock in an interest rate for their bond issue. Foreign Exchange Futures - used to hedge risks associated with exchange rate fluctuations. A firm can use a . | 2002, Prentice Hall, Inc. Ch. 21: Risk Management Innovations in Risk Management Futures contract: a contract to buy or sell a stated commodity or financial claim at a specified price at some specified future time. Futures: a simple example Suppose a farmer plans to harvest 10,000 bushels of corn in 6 months. The current price is $ per bushel. The farmer sells a futures contract, which will allow him to sell corn at per bushel in 6 months. If the price of corn falls to $ per bushel, the farmer loses $5,000 ($ x 10,000 bushels) on his corn, but gains $5,000 on his futures contract. Futures: a simple example If the price of corn rises to $ per bushel, the farmer gets $5,000 more for his corn, but loses $5,000 on the futures contract. The farmer has effectively locked in a price of $ per bushel and has hedged his risk. Futures Trading Requires: An Organized Exchange - the Chicago Board of Trade is the oldest and largest futures exchange. Standardized Contracts
