Essentials of Investments: Chapter 17 - Futures Markets and Risk Management presents Futures and Forwards, Basics of Futures Contracts, Existing Contracts, Trading Mechanics, Margin and Marking to Market, Margin and Trading Arrangements. | CHAPTER 17 Futures Markets and Risk Management INVESTMENTS | BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 19-2 Futures and Forwards • Forward – a deferred-delivery sale of an asset with the sales price agreed on now. • Futures - similar to forward but feature formalized and standardized contracts. • Key difference in futures – Standardized contracts create liquidity – Marked to market – Exchange mitigates credit risk INVESTMENTS | BODIE, KANE, MARCUS 19-3 Basics of Futures Contracts • A futures contract is the obligation to make or take delivery of the underlying asset at a predetermined price. • Futures price – the price for the underlying asset is determined today, but settlement is on a future date. • The futures contract specifies the quantity and quality of the underlying asset and how it will be delivered. INVESTMENTS | BODIE, KANE, MARCUS 19-4 Basics of Futures Contracts • Long – a commitment to purchase the commodity on the delivery date. • Short – a commitment to sell the commodity on the delivery date. • Futures are traded on margin. • At the time the contract is entered into, no money changes hands. INVESTMENTS | BODIE, KANE, MARCUS 19-5 Basics of Futures Contracts • Profit to long = Spot price at maturity - Original futures price • Profit to short = Original futures price - Spot price at maturity • The futures contract is a zero-sum game, which means gains and losses net out to zero. INVESTMENTS | BODIE, KANE, .
