Chapter 8 - Fundamentals of the futures market. This chapter presents the following content: The concept of futures contracts, market mechanics, market participants, the clearing process principles of futures contract pricing, spreading with commodity futures. | © 2004 South-Western Publishing Chapter 8 Fundamentals of the Futures Market Outline The concept of futures contracts Market mechanics Market participants The clearing process Principles of futures contract pricing Spreading with commodity futures The Concept of Futures Contracts Introduction The futures promise Why we have futures contracts Ensuring the promise is kept Introduction The futures market enables various entities to lessen price risk, the risk of loss because of uncertainty over the future price of a commodity or financial asset As with options, the two major market participants are the hedger and the speculator The Futures Promise Introduction Futures compared to options Futures compared to forwards Futures regulation Trading mechanics Introduction A futures contract is a legally binding agreement to buy or sell something in the future Introduction (cont’d) The person who initially sells the contract promises to deliver a quantity of a standardized commodity to a designated delivery point during the delivery month The other party to the trade promises to pay a predetermined price for the goods upon delivery Futures Compared to Options Both involve a predetermined price and contract duration The person holding an option has the right, but not the obligation, to exercise the put or the call With futures contracts, a trade must occur if the contract is held until its delivery deadline Futures Compared to Forwards A futures contract is more similar to a forward contract than to an options contracts A forward contract is an agreement between a business and a financial institution to exchange something at a set price in the future Most forward contracts involve foreign currency Futures Compared to Forwards (cont’d) Forwards are different from futures because: Forwards are not marketable Once a firm enters into a forward contract there is no convenient way to trade out of it Forwards are not marked to market The . | © 2004 South-Western Publishing Chapter 8 Fundamentals of the Futures Market Outline The concept of futures contracts Market mechanics Market participants The clearing process Principles of futures contract pricing Spreading with commodity futures The Concept of Futures Contracts Introduction The futures promise Why we have futures contracts Ensuring the promise is kept Introduction The futures market enables various entities to lessen price risk, the risk of loss because of uncertainty over the future price of a commodity or financial asset As with options, the two major market participants are the hedger and the speculator The Futures Promise Introduction Futures compared to options Futures compared to forwards Futures regulation Trading mechanics Introduction A futures contract is a legally binding agreement to buy or sell something in the future Introduction (cont’d) The person who initially sells the contract promises to deliver a quantity of a .
