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Financial Institutions and Markets Winter 2009-10

Financial Institutions and Markets Winter 2009-10. Dr. Andrew L. H. Parkes Day 17 “How do financial markets work?”. 卜安吉. Futures Contracts. Futures Contracts: Long – buying to sell in the future Short – selling to buy in the future

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Financial Institutions and Markets Winter 2009-10

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  1. Financial Institutions and MarketsWinter 2009-10 Dr. Andrew L. H. Parkes Day 17 “How do financial markets work?” 卜安吉

  2. Futures Contracts Futures Contracts: Long – buying to sell in the future Short – selling to buy in the future Hedging: to minimize risk – with financial futures, to minimize interest-rate risk (to protect oneself) One party MUST DELIVER the financial instrument (bond, for example) on the stated future date to the other party. Examples in class and for homework involved Treasury Bonds. Futures Traders on the Floor of the Exchange Financial Institutions & Markets, Day 17

  3. Arbitrage Elimination of a riskless profit opportunity in a market. So because of Arbitrage: at expiration date, the price of contract = the price of the underlying asset delivered … p. 645 Open Interest – the number of contracts outstanding Notice also that contract sizes have been standardized, see Table 1 on page 647 for widely traded futures contracts Financial Institutions & Markets, Day 17

  4. Margin Requirements The margin requirement is the initial deposit. Because your account is “market to market” every day, the change in value may fall. If the margin account falls too far, you may be required to add to your margin account. That is, your margin requirement MUST be maintained at a certain amount. Notice that you are not required to keep the full amount on account – only a small portion (margin). Operating on Margin Financial Institutions & Markets, Day 17

  5. Reducing Systematic Risk • Using Stock Index Futures • Using our concept of beta from the CAPM (Financial Management) • Portfolio Insurance this has been called • Minimizes overall swings in the market Financial Institutions & Markets, Day 17

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