The Futures Market The Futures Market: Introduction and and Mechanics Mechanics
The Futures Market The Futures Market: Introduction and and Mechanics Mechanics
The Futures Market The Futures Market: Introduction and and Mechanics Mechanics
(c) 2002-2013 Gary R. Evans. May only be used for non-profit educational purposes only without permission of the author.
Key terms
Spot price: Today's cash price. Futures price: Today's price of a specified futures contract, like December 2010 NYMEX light sweet crude contract. Expected future spot price: Exactly what the name implies. (There is a theory that says that this price will not be the same as the futures price). Volume: The number of contracts traded today (or in any period of time) Open interest: The number of contracts that are "open," "open " that exist right now, that have a matched long and short position. e-Mini contract: A much smaller contract in some commodity, typically electronically traded.
The exchanges
The primary futures exchanges in the U.S. were the New York Mercantile Exchange (NYMEX), the Chicago Board of Trade (CBOT), and the Chicago Mercantile Exchange (CME) and the New York Board of Trade (NYBOT). In 2007 the first three exchanges listed here were merged into the CMEGroup [NYSE: CME]. CME] Globex, Globex an electronic trading arm, is a division of the CMEGroup. The huge, global IntercontinentalExchange [NYSE: ICE], which bought NYBOT in 2007, competes with the CMEGroup and emphasizes electronic trades. ICE trades energy futures through the U.K.-regulated London market, and its commodity, foreign exchange, and index futures through a U.S.-regulated market. Formerly exchanges sold "seats" allowing members to trade on the exchange floor, called the "pit" and to bid and ask using a complicated system of hand signals and verbal orders in an "open outcry" system. This system is similar to that used on the NYSE. Electronic trading is rapidly replacing open outcry. ICE is purely electronic. Trades are cleared through a clearinghouse that matches buy and sell orders. The "clearing member" is a market maker who assures that all trades are matched, or matches it himself.
Web sites
Intercontinental Exchange (owns NYME): http://www.theice.com CMEGroup (CME and CBOT): http://www.cmegroup.com http://www cmegroup com Ino (good free site for checking prices): http://www.ino.com Kitco (metals): http://www.kitco.com OpenECry (online futures broker free practice account): http://www.openecry.com Class assignment: Peruse the CMEGroup site before the next lecture and see what information they provide. Look at the list of commodities they trade and look at their contract specifications and prices.
Quotes are in $, some contract quotations in cents. Prices are for November 11, 2013 or within a few days. Source: CMEGroup November 2013
Example: NYMEX (CMEGroup CMEGroup) ) Light Sweet Crude Futures A single contract, the December 2010 CMEGroup CLZO. Futures price was $87.18 on 11/15/2010 Spot price was $86.49. I use this 2010 example because multiple instructional examples in these lectures and the book are based upon this contract.
Source: CMEGroup.com
Source: http://www.CMEGroup.com
Pricing of quote
$ per bbl
The exchange
CMEGroup p( (formerly y NYMEX) ) Initial margin requirement (.... back then) $5,063 non-member, $3,750 member
On April 8, 2009.
Delivery location
Various named locations in Cushing, Oklahoma or pipeline access to TEPPCO or Equilon Pipeline Co.
Settlement
Unlike options, futures are not paid for (which is to say, the commodity to be delivered is not paid for) until the delivery of the commodity. The buyer of the future, however, is required to deposit funds in a special margin account which is, at the end of each day, adjusted to reflect the capital gain or loss. The starting required balance for this account is called the initial margin. The seller is also required to maintain a margin account that is adjusted daily and if the seller does not own the commodity, may have to meet special requirements. The account balance must always be kept above the maintenance margin, sometimes called the day margin.
For a short contract, the signs in the Gain would simply reverse.
Each one cent move affects margin by $10. Leverage is 17.22 to 1.
Therefore Therefore, you are effectively paying $87 because of the adjustment in your margin account.
Example
In November, you buy an December Crude Oil future for $87.18 per barrel (nominal value $87,180). You are long. You want to take delivery. Spot price in on the day you enter this contract is $86.49 (not relevant to settlement nor to this contract). When Nov 22 arrives, spot price has risen to $91.50. Question: What are the settlement terms? You take delivery of the oil in Dec at the Nov 22 spot ($91.50), not $87.18, so you pay $91,500. You have gained $4,320 in your margin account. The total cost of this contract to you is ($91,500 4,320) which equals $87,180, exactly as you intended. Therefore, the only asset you have is the cash balance of your margin account! (Relevant to delta ETFs).
Short also
The previous example was for a long position (taking delivery or the equivalent) With futures equivalent). futures, you are just as likely, likely and it is just as easy, easy to go short. With that position the trader makes delivery or the equivalent. In a spec position you benefit if the price goes down while you are in the contract.
2.
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Implicit Leverage
Clearly with futures you have implicit leverage, which equals the value of the position divided by the initial margin. [Note the example in the second slide after this]. This leverage will clearly compound your gain or loss by the scale of the leverage. I now deemphasize this somewhat.
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Source: ino.com
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Originally rose because of growing demand by developing nations and a severe shortage in China because of weather.
India announces better than expected sugar crop on same day that China raises i interest i t t rates t to t control t l growth. th
Mudder Daniel Strenge was the largest sugar trader in the world (Cargill) when this contract was active.
112,000 pounds, notional value $37,000 @ .33, $29,355 @ .2621 Maint Margin $2,000 Initial Margin $2,200 (Nov 2010)
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