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| same product, no matter who produces it; not branded |
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| one unit of a commodity is perfectly substitutable with another unit of the same commodity |
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| Three Characteristics of a Futures Contract |
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Fungible
Liquid
Traded on Exchange |
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| : An obligation to make/take delivery, or to accept the final settlement price, for something (may or may not be a commodity) at some future date |
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| Four Negative Characteristics of Forward Contracts |
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Not fungible
Illiquid
Traded Over the Counter
Has Risk of Default |
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| marketplace where futures/options contracts are bought and sold |
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| Months for delivery/final settlement |
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| Minimum price fluctuation |
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| Maximum daily price change |
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| Number of contracts that can be held by an individual or entity |
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| Guarantee financial performance of both counterparties |
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| Similar to a security deposit |
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| Clearing firms or Member firms |
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| Member firms serve as the primary source of capital for the clearinghouse |
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| Central Limit Order Book (CLOB) |
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| Listing of bids and asks at various prices |
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| Used to value all positions at the end of the day |
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| number of contracts traded (bought or sold) over some period of time (day, week, month, year, etc.) |
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| Number of contracts in existence at some point in time (end of day, end of month, etc.) |
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| closest to delivery/expiration |
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| farthest from delivery/expiration |
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| the amount of margin that must be posted by a customer when a position is established |
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| the minimum amount of margin that must be available to avoid a margin call |
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| the amount that must be posted to meet a margin call and bring the account back up to the Initial Margin level |
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| buying the cheaper one and selling the more expensive one |
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| Three cost of carry charges |
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| Using futures positions with cash positions to manage price risk |
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| Hedging cash commodity X with futures Y |
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Number of futures contracts for a given cash position that minimizes total risk
B=Slope=Hedge Ratio in Linear Regressions |
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percentage of price risk that is eliminated by the hedge
R^2=coefficient of determination=Hedging Effectiveness in Linear Regressions |
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| Using futures positions to profit from favorable price changes |
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| buy and sell large volumes (thousands or more) over the course of a day at one tick off the market |
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| buy or sell smaller volumes (hundreds or more), hoping to capitalize on intra-day price moves |
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| trade on price relationships or differences rather than outright positions; arbitrageurs who look for price discrepancies |
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spread between different months of the same commodity
July vs. November Soybeans |
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spread between the same months of different commodities (cont.)
March Gold vs. March Silver |
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| Delivery forces the futures price and the price of the physical commodity to come together, in a process |
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| Speculators economic role is... |
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