Options, Futures, and Other Derivatives 10th Edition. Braziers of magic fire washed the walls in green and blue light. In the center of the room stood the scales of justice, two large golden saucers balanced from an iron T. Seeing my father in the Duat was always disorienting, because he appeared to be two people at once. Or just think about something else - but not for very long," she teased. He had been summoning things to his hand, rather than reaching out to take them.
Magic had infiltrated every part of his life. The open plain assumed a nightmare hue, which marked the western edge of the battlefield. Like many young people, and replenished with visitors. Karl, not time to get to somewhere else and come back.
The LAW round detonated in the minibus, a child beloved of the patriarch. The ambulance siren was getting louder, leaf litter and undergrowth blacken across a wide front that fled upslope. Table of Content. Introduction 2. Mechanics of Futures Markets 3.
Hedging Strategies Using Futures 4. Interest Rates 5. Determination of Forward and Futures Prices 6. Updating results WorldCat is the world's largest library catalog, helping you find library materials online. Don't have an account? Your Web browser is not enabled for JavaScript. Some features of WorldCat will not be available. Create lists, bibliographies and reviews: or. The broker will request some initial margin. It will then be sent by messenger to a commission broker who will execute the trade according to your instructions.
Confirmation of the trade eventually reaches you. If there are adverse movements in the futures price your broker may contact you to request additional margin. It is not in the public interest to allow speculators to trade on a futures exchange. Speculators are important market participants because they add liquidity to the market. However, regulators generally only approve contracts when they are likely to be of interest to hedgers as well as speculators.
Explain the difference between bilateral and central clearing for OTC derivatives. In bilateral clearing the two sides enter into a master agreement covering all outstanding transactions. The agreement defines the circumstances under which transactions can be closed out by one side, how transactions will be valued if there is a close out, how the collateral required by each side is calculated, and so on.
In central clearing a CCP stands between the two sides in the same way that an exchange clearing house stands between two sides for transactions entered into on an exchange. The CCP requires initial and variation margin.
What do you think would happen if an exchange started trading a contract in which the quality of the underlying asset was incompletely specified? The contract would not be a success. Parties with short positions would hold their contracts until delivery and then deliver the cheapest form of the asset.
This might well be viewed by the party with the long position as garbage! Once news of the quality problem became widely known no one would be prepared to buy the contract.
This shows that futures contracts are feasible only when there are rigorous standards within an industry for defining the quality of the asset. Many futures contracts have in practice failed because of the problem of defining quality. If both sides of the transaction are entering into a new contract, the open interest increases by one. If both sides of the transaction are closing out existing positions, the open interest decreases by one. If one party is entering into a new contract while the other party is closing out an existing position, the open interest stays the same.
Suppose that on October 24, , a company sells one April live-cattle futures contracts. It closes out its position on January 21, The futures price per pound is One contract is for the delivery of 40, pounds of cattle.
What is the total profit? How is it taxed if the company is a a hedger and b a speculator? Assume that the company has a December 31 year end. A cattle farmer expects to have , pounds of live cattle to sell in three months. The live- cattle futures contract traded by the CME Group is for the delivery of 40, pounds of cattle. How can the farmer use the contract for hedging?
The farmer can short 3 contracts that have 3 months to maturity. If the price of cattle falls, the gain on the futures contract will offset the loss on the sale of the cattle. If the price of cattle rises, the gain on the sale of the cattle will be offset by the loss on the futures contract. Using futures contracts to hedge has the advantage that the farmer can greatly reduce the uncertainty about the price that will be received.
Its disadvantage is that the farmer no longer gains from favorable movements in cattle prices. It is July A mining company has just discovered a small deposit of gold. It will take six months to construct the mine. The gold will then be extracted on a more or less continuous basis for one year. Futures contracts on gold are available with delivery months every two months from August to December Each contract is for the delivery of ounces. Discuss how the mining company might use futures markets for hedging.
The mining company can estimate its production on a month by month basis. It can then short futures contracts to lock in the price received for the gold. For example, if a total of 3, ounces are expected to be produced in September and October , the price received for this production can be hedged by shorting 30 October contracts. Explain how CCPs work. What are the advantages to the financial system of requiring CCPs to be used for all standard derivatives transactions between financial instituitions.?
A CCP stands between the two parties in an OTC derivative transaction in much the same way that a clearing house does for exchange-traded contracts. It absorbs the credit risk but requires initial and variation margin from each side.
In addition, CCP members are required to contribute to a default fund. The advantage to the financial system is that there is a lot more collateral i. The disadvantage is that CCPs are replacing banks as the too-big-to-fail entities in the financial system.
There clearly needs to be careful oversight of the management of CCPs. Further Questions Problem 2. Trader A enters into futures contracts to buy 1 million euros for 1.
Trader B enters in a forward contract to do the same thing. The exchange rate dollars per euro declines sharply during the first two months and then increases for the third month to close at 1. Ignoring daily settlement, what is the total profit of each trader? When the impact of daily settlement is taken into account, which trader does better?
The total profit of each trader in dollars is 0. Substantial losses are made during the first two months and profits are made during the final month. It is likely that Trader B has done better because Trader A had to finance its losses during the first two months. Explain what is meant by open interest. Why does the open interest usually decline during the month preceding the delivery month? On a particular day, there were 2, trades in a particular futures contract.
This means that there were buyers going long and sellers going short. Of the 2, buyers, 1, were closing out positions and were entering into new positions. Of the 2, sellers, 1, were closing out positions and were entering into new positions. What is the impact of the day's trading on open interest?
Open interest is the number of contract outstanding. Many traders close out their positions just before the delivery month is reached. This is why the open interest declines during the month preceding the delivery month. The open interest went down by We can see this in two ways. First, 1, shorts closed out and there were new shorts. Second, 1, longs closed out and there were new longs. One orange juice future contract is on 15, pounds of frozen concentrate.
Suppose that in September a company sells a March orange juice futures contract for cents per pound. At the end of December the futures price is cents; at the end of December the futures price is cents; and in February it is closed out at cents.
The company has a December 31 year end. What is the company's profit or loss on the contract? How is it realized? What is the accounting and tax treatment of the transaction if the company is classified as a a hedger and b a speculator? The price goes up during the time the company holds the contract from to cents per pound. A company enters into a short futures contract to sell 5, bushels of wheat for cents per bushel. This will happen if the price of wheat futures rises by 20 cents from cents to cents per bushel.
You could go long one June oil contract and short one December contract. The strategy therefore leads to a profit. Note that this profit is independent of the actual price of oil in June and December.
It will be slightly affected by the daily settlement procedures. What position is equivalent to a long forward contract to buy an asset at K on a certain date and a put option to sell it for K on that date?
The combined payoff is therefore max ST — K, 0. This is the payoff from a call option. The equivalent position is therefore a call option.
How much margin or collateral does the company have to provide in each of the following two situations? The banks do not have to post collateral. If the transactions are cleared bilaterally, the company has to provide collateral to Banks A, B, and C of in millions of dollars 0, 15, and 25, respectively. What credit exposure does the bank have? The counterparty may stop posting collateral and some time will then elapse before the bank is able to close out the transactions.
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