SECTION IV

1. SECTION IV DERIVATIVES

2. DERIVATIVES • FUTURES AND OPTIONS CONTRACTS • RISK MANAGEMENT TOOLS • THEY ARE THE AGREEMENTS ON BUYING AND SELLING OF THESE INSTRUMENTS AT THE AGREED-UPON PRICE AND ON THE AGREED- UPON DATE.

3. DERIVATIVES • IN TURKEY CMB REGULATIONS SPECIFY 5 VEHICLES UPON WHICH THE DERIVATIVES CAN BE TRADED: • COMMODITIES • SECURITIES • GOLD AND PRECIOUS METALS • FOREIGN EXCHANGE • INDEXES

4. DERIVATIVES • CASH MARKET: • SPOT MARKET • FORWARD MARKET. • FUTURE AND FORWARD CONTRACTS ARE SIMILAR HOWEVER THERE ARE ALSO DIFFRENCES BTW THEM. • FUTURE AND FORWARD CONTRACTS ARE DIFFERENT FROM OPTIONS CONTRACTS.

5. DERIVATIVES • SOME OF THE BEST-KNOWN WORLD FUTURES AND OPTIONS EXCHANGES ARE: • Chicago Board Options Exchange (CBOE) • Chicago Mercantile Exchange (CME) • London International Financial Futures Exchange (LIFFE) • EUREX of Frankfurt • MATIF of Paris • SIMEX of Singapore

6. CHAPTER 9 FUTURES

7. FUTURES • A futures contract is an agreement between two parties that commits one party to sell a commodity or security (underliers) to the other at a given price and amount and on a specified future date.

8. FUTURES • Futures exchanges in U.S. are listed below; • Chicago Board of Trade (CBOT) • Chicago Mercantile Exchange (CME) • New York Mercantile Exchange (NYME) • Commodity Exchange (COMEX) • EVERY EXCHANGE HAS A CLEARING HOUSE.

9. FUTURES • FUNCTIONS OF THE CLEARING HOUSE; • IT GUARANTEES THAT THE TWO PARTIES WILL PERFORM THE TRANSACTIONS. • AT THE END OF THE TRADING DAY, IT MATCHES EACH PURCHASE WITH THE CORRESPONDING SALE AND COMPUTES EACH PARTIES GAINS AND LOOSES: “MARK TO MARKET”.

10. FUTUES AND OPTIONS TRADED ON O.E. PRICE, AMOUNT, DATE ETC. ARE STANDARTIZED BY THE EXCHANGE DAILY SETTLEMET REQUIRES MARGIN ACCOUNT REGULATED FORWARD TRADED ON OTC MARKETS NOT STANDARD SETTLED ONLY AT DELIVERY DOES NOT REQUIRE A MARGIN ACCOUNT UNREGULATED FUTURES

11. FUTURES • MOTIVES FOR ENTERING INTO FUTURES MARKET; • HEDGING • SPECULATION AND • ARBITRAGE

12. FUTURES: LONG AND SHORT POSITIONS • THE BUYER OF A FUTURES CONTRACT IS SAID TO BE LONG, AND HAS A LONG POSITION. • THE SELLER OF A FUTURES CONTRACT IS SAID TO BE SHORT, AND HAS A SHORT POSITION.

13. FUTURES; L&S POSITIONS • A PURCHASE CAN BE EXIST TO CLOSE OUT A SHORT POSITION OR A SALE CAN BE EXIST TO CLOSE OUT A LONG POSITION. • FOR EVERY LONG POSITION THERE IS A SHORT POSITION. • ZERO-SUMS GAME.

14. FUTURES; L&S POSITIONS • LONG POSITION: “LONG HEDGE” • SHORT POSITION: “SHORT HEDGE”

15. FUTURES: LEVERAGE • USE OF CREDIT OR BORROWED FUNDS TO IMPROVE ONE'S SPECULATIVE CAPACITY AND INCREASE THE ROR FROM AN INVESTMENT,AS IN BUYING SECURITIES ON MARGIN. • THE LEVERAGE OF FUTURES TRADING REFERS TO ONLY A SMALL AMOUNT OF MONEY IS DEPOSITED TO BUY OR SELL A FUTURES CONTRACT.

16. LEVERAGE • INITIAL MARGIN IS 5-15% OF THE VALUE OF THE UNDERLYING SECURITIES. • THIS LOW INITIAL MARGIN MAGNIFIES THE PERCENTAGE OF LOSS OR PROFIT POTENTIAL.

17. FUTURES: MARGIN • A DEPOSIT THAT CAN BE DRAWN UPON BY THE BROKERAGE FIRM TO COVER LOOSES THAT MIGHT BE INCURRED IN THE FUTURES TRADING. • BOTH THE BUYER AND THE SELLER OF A FUTURES CONTRACT ARE REQUIRED TO PROVIDE MARGIN.

18. FUTURES: MARGIN • MIN. MARGIN REQUIREMENTS FOR EACH CONTRACT ARE SET BY THE EXCHANGE. • THERE ARE TWO TYPES OF MARGINS; • INITIAL (ORIGINAL) MARGIN • MAINTENANCE MARGIN

19. FUTURES • COMMODITY FUTURES • FINANCIAL FUTURES • OPTIONS ON FUTURES • INDEX FUTURES

20. COMMODITY FUTURES • AN AGREEMENT COVERING THE PURCHASE AND SALE OF PHYSICAL GOODS FOR FUTURE DELIVERY ON A COMMODITY EXCHANGE. • IT REQUIRES THE SELLER TO DELIVER A SPECIFIED QUANTITY OF A COMMODITY TO A DESIGNED LOCATION TO THE BUYER AT A SPECIFIED PRICE AND ON A SPECIFIED DATE

21. COMMODITY FUTURES • THEY ARE USED BY; • PRODUCERS • CONSUMERS • INVESTORS • EXCHANGE-FLOOR TRADERS

22. COMMODITY MARKET • IN THIS MARKET THERE ARE MANY BUYERS AND SELLER, NONE OF THEM IS LARGE TO DETERMINE THE PRICES • PRICES ARE DETERMINED BY THE MARKET DEMAND AND SUPPLY, EFFECTED BY POTICAL AND ECONOMICAL FACTORS.

23. COMMODITY FUTURES • ONLY ABOUT 2% OF ALL FUTURE CONTRACTS RESULT IN DELIVERY. THEY CHANGE HANDS IN MANY TIMES.

24. FINANCIAL FUTURES • THEY ARE INTRODUED AFTER 1970’S • THERE ARE 3 MAIN TYPES OF FINANCIAL FUTURES; • INTEREST RATE FUTURES • CURRENCY FUTURES • STOCK INDEX FUTURES

25. FINANCIAL FUTURES • INVESTORS CAN USE THEM FOR HEDGING AND SPECULATION PURPOSES: • INVESTORS CAN HEDGE AGAINST CHANGES IN STOCK PRICES OR AN INVESTOR CAN MAKE PROFIT FROM DECLINING PRICES BY SELLING AND FROM RISING PRICES BY BUYING • BORROWERS CAN HEDGE AGAINST HIGHER INTEREST RATES, LENDERS AGAINST LOWER INTEREST RATES.

26. FINANCIAL FUTURES • TRADES IN FUTURES CONTARACTS ARE SETTLED BY ENTERING INTO AN OFFSETTING POSITION: • A CONTRACT SOLD IS CLOSED OUT BY A PURCHASE AND • A CONTRACT BOUGHT IS CLOSED OUT BY A SELLING CONTRACT.

27. FINANCIAL FUTURES • THEY ARE TRADED ON EXCHANGES. THE EXCHANGE CLEARING HAUSE ACT AS THE THIRD PARTY AND GUARANTOR. • DELIVERY RARELY OCCURS.

28. OPTIONS ON FUTURES • AN OPTION ON A FUTURE CONTRACT GIVES THE BUYER THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL A PARTICULAR FUTURES CONTRACT AT A STATED PRICE, AT ANY TIME PRIOR TO A SPECIFIED DATE. • THERE ARE TWO TYPES; • CALL OPTIONS • PUT OPTIONS

29. OPTIONS ON FUTURES • The buyer of a call option buys the right, but not the obligation, to purchase a particular futures contract at a stated price at any time during the life of the option. • The buyer of a put option acquires the right, but not the obligation, to sell a particular futures contract at a stated price at any time during the life of the option.

30. OPTIONS ON FUTURES • If the option is exercised, settlement is either through physical delivery or cash settlement. • Options on futures involve two sets of relationship; • The one between the futures contract and the underlying commodity, security, or index • The one between the option and the future contract

31. OPTIONS ON FUTURES • Any options strategy can also be applied to futures options. Example; • If interest rates are expected to decline, calls can be purchased or the investor can write (sell) puts to earn premium. • If interest rates are forecasted to rise, puts can be bought or calls can be written to earn the premium.

32. INDEX FUTURES • IT IS A CONTRACT TO BUY OR SELL THE FACE VALUE OF A STOCK INDEX. • TWO PRINCIPAL STOCK INDEX FUTURES CONTRACTS ARE TRADED IN U.S.A. • S&P 500 STOCK INDEX CONTRACT AT THE CME • S&P MINI INDEX CONTRACT AT THE CME