FUTURES
Futures
Basis of Present Day Trading •
Structured commodity trading began in the 18th century – –
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rice and Silk trading in Japan tulip bulbs in Holland
Mid 19th Century – US Central Grains Markets were established. –
Farmers could sell with immediate delivery or for forward delivery
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Grain, Meat & Livestock
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Metals, Energy, Currency, Equity & Interest Rates
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Chicago Mercantile Exchange launched contracts on financial instruments in the 1970s
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London International Financial Futures Exchange (LIFFE) opened in 1982
Futures – Definition •
a futures contract is
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…a standardized contract,
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…traded on a futures exchange,
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…to buy or sell a certain underlying instrument
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…at a certain date in the future,
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…at a specified price
Standardized Contracts •
Pre determined contracts guarantees the amounts and quality is standardized
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Lot size (amount) – – – –
Corn: 50 Metric Tons Wheat: 5’000 Bushels Crude Oil: 1’000 Barrels Gold: 100 Troy Ounce
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Tick Size
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Delivery Date
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Instrument Traded Currency
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Protective Limits
Futures Exchanges & Underlying Instruments Exchanges (~75 worldwide) • •
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Chicago Board of Trade (CBOT) - Interest Rate derivatives, Agricultural, Index & Metals Chicago Mercantile Exchange (CME) Currencies, Agricultural, Index & Interest Rate Products London Commodity Exchange - softs: grains and meats Tokyo Commodity Exchange (TOCOM) London Metal Exchange - metals: copper, aluminium, lead, zinc, nickel and tin. New York Board of Trade (NYBOT)- softs: cocoa, coffee, cotton, orange juice, sugar New York Mercantile Exchange - energy and metals ICE Futures - Energies Euronext.liffe Sydney Futures Exchange
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Foreign exchange market (currency) Money market (interest) Bond market (debt) Equity index market Soft Commodities market
Date, Expiry & Settlement Expiry Date is the time when the final prices of the future is determined.
Physical delivery The amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position
Cash settlement A cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market.
N.B. Saxo Bank A/S closes open client positions, at expiry, on futures that are physically delivered.
Pricing
The Ticker Month Indicators 1 F – January 2 G – February 3 H – March 4 J – April 5 K – May 6 M – June 7 N – July 8 Q – August 9 U – September 10 V – October 11 X – November 12 Z - December
Trading with Saxo • • • •
Price Margin Market Depth Order Types – – – –
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Market Limit Stop Trailing
Additional Information – –
Lot Size Expiry
Types of Futures Traders Hedgers…
Speculators…
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Have an interest in the underlying commodity and are seeking to hedge out the risk of price changes
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Hedgers typically include producers and consumers of a commodity
Seek to make a profit by predicting market moves and buying a commodity "on paper" for which they have no practical use
Advantages of Futures • • • • • • • • • •
Margin Based Trading – Leveraged Trading Low Commissions Very Liquid (tight spreads) Short Selling Interest Free Global Markets Trading Hours Exchange clearing (no counterparty risk) Hedging Arbitrage
Example of Trading Crude oil Trading the Underlying product
Trading the Future
Buy 1’000 Barrels of Crude Oil @ 69,22 = USD 69’220
Buy 1 Lot (1’000 barrels) of Crude Oil @ 69,22
Price Increases to 70,22
Initial Margin Deposit required = USD 4’050
Profit = USD 1’000
Price Increases to 70,22
Return On Investment, ROI = 1’000/69’220 = 1,4%
Profit = USD 1’000 Return On Investment, ROI = 1’000/4’050 = 24,7%
N.B. Increased up-side also means increased down-side