The main contents of this chapter include all of the following: The history of commodity futures, the evolution since 1980 of financial futures, stock index futures, interest rate futures, oil as a fundamental factor in world economy, innovation in the future. | Lecture 20: Stock Index, Oil and Other Futures Markets Stock Price Index Futures Cash settlement rather than physical delivery Settlement is 250*(Indext-Futurest-1) Fair value: Lower Trading Costs on Futures vs. Spot Market for Stock Theory of optimal bid-asked spread. Even though futures markets are not dealer markets, there is in effect a bid-asked spread, and it is narrower than for individual stocks. Less likely to be superior information to “pick off” dealers in stock index futures market than in market for individual stocks. Futures on Individual Stocks US ban on futures on individual stocks was fully lifted in December 2001. Trading in futures on individual stocks began at LIFFE (London International Financial Futures and Options Exchange) on NQLX LLC January 29, 2001 US trading began 2002 at OneChicago LLC (owned jointly by CME, CBOT and CBOE) Volume of trade has been very disappointing, delisting is occurring Why a Market for Futures on Individual Stocks? In London, traders avoid the UK Stamp Duty In US, traders circumvent margin requirements on stocks. Final demise of margin requirements. Principal argument that accounts for US approving them is that foreign countries are now approving them, and US does not want to be left out. Oil Futures Crude light sweet oil (New York Mercantile Exchange) contract size: 1000 barrels, open interest 431,000 contracts Brent crude, North Sea (International Petroleum Exchange, London) contract size: 1000 barrels, open interest 232,000 contracts Nature of Oil Storage Most stored oil is “moving through the pipeline” of oil tankers, refiners, distributors and retailers. Estimated oil inventories can be found on web site Government Oil Reserves Strategic Petroleum Reserve (created 1975) in caverns in Louisiana and Texas – 572 million barrels, only 60 days supply. Not used to stabilize prices. In 2000, President Clinton established a 2 million barrel heating oil reserve in New York and New Haven to help stabilize US | Lecture 20: Stock Index, Oil and Other Futures Markets Stock Price Index Futures Cash settlement rather than physical delivery Settlement is 250*(Indext-Futurest-1) Fair value: Lower Trading Costs on Futures vs. Spot Market for Stock Theory of optimal bid-asked spread. Even though futures markets are not dealer markets, there is in effect a bid-asked spread, and it is narrower than for individual stocks. Less likely to be superior information to “pick off” dealers in stock index futures market than in market for individual stocks. Futures on Individual Stocks US ban on futures on individual stocks was fully lifted in December 2001. Trading in futures on individual stocks began at LIFFE (London International Financial Futures and Options Exchange) on NQLX LLC January 29, 2001 US trading began 2002 at OneChicago LLC (owned jointly by CME, CBOT and CBOE) Volume of trade has been very disappointing, delisting is occurring Why a Market for Futures on Individual Stocks? In London, traders .
