Podcast
Questions and Answers
What is the roll yield when there is backwardation in the futures curve?
What is the roll yield when there is backwardation in the futures curve?
- Positive (correct)
- Negative
- Zero
- Indeterminate
In the context of futures pricing intuition, what must have the same market determined costs over time?
In the context of futures pricing intuition, what must have the same market determined costs over time?
- Both a and b (correct)
- Neither a nor b
- Taking a long position in futures on the asset
- Purchasing the asset now and storing it
What is the consequence of spot-futures parity not being observed?
What is the consequence of spot-futures parity not being observed?
- No arbitrage opportunity
- Temporary arbitrage opportunity (correct)
- Permanent arbitrage opportunity
- Market inefficiency
What action should be taken if the futures price is too high?
What action should be taken if the futures price is too high?
What is the purpose of the hedge in the given example?
What is the purpose of the hedge in the given example?
What is the formula for the roll yield in the context of futures?
What is the formula for the roll yield in the context of futures?
What is the consequence of futures being purchased on margin?
What is the consequence of futures being purchased on margin?
What is the term for the situation when the futures curve is upward sloping?
What is the term for the situation when the futures curve is upward sloping?
What is the formula for calculating the profit on a futures contract?
What is the formula for calculating the profit on a futures contract?
What does the convergence property state about the final futures price?
What does the convergence property state about the final futures price?
What does open interest represent in the context of futures contracts?
What does open interest represent in the context of futures contracts?
What is the term for the difference between the futures price and the spot price?
What is the term for the difference between the futures price and the spot price?
When does contango occur in the futures market?
When does contango occur in the futures market?
Which entity uses futures contracts to hedge their needs for dairy and frozen food products?
Which entity uses futures contracts to hedge their needs for dairy and frozen food products?
What does basis risk refer to in the context of futures contracts?
What does basis risk refer to in the context of futures contracts?
What does the Cboe Volatility Index (VIX) represent?
What does the Cboe Volatility Index (VIX) represent?
What has raised concerns about creating a feedback loop in the trading of securities derived from volatility measures?
What has raised concerns about creating a feedback loop in the trading of securities derived from volatility measures?
In which markets are futures contracts used for products like wheat, corn, and soybeans?
In which markets are futures contracts used for products like wheat, corn, and soybeans?
Who uses futures contracts to manage the price risk of their crops and ensure stable revenues?
Who uses futures contracts to manage the price risk of their crops and ensure stable revenues?
What represents the number of outstanding contracts in the futures market?
What represents the number of outstanding contracts in the futures market?
What is the typical range for margin requirements for futures contracts?
What is the typical range for margin requirements for futures contracts?
Who seeks to profit from price movements in futures contracts?
Who seeks to profit from price movements in futures contracts?
What is the purpose of margin deposits in futures contracts?
What is the purpose of margin deposits in futures contracts?
Who uses futures and forward contracts to plan for the future and reduce uncertainty in markets?
Who uses futures and forward contracts to plan for the future and reduce uncertainty in markets?
What do hedgers do in the futures market?
What do hedgers do in the futures market?
What is the financial exposure purpose of futures contracts?
What is the financial exposure purpose of futures contracts?
How are futures contracts traded?
How are futures contracts traded?
What happens with the futures price based on market movements?
What happens with the futures price based on market movements?
Who are the participants in futures exchanges?
Who are the participants in futures exchanges?
What is the role of speculators in the futures market?
What is the role of speculators in the futures market?
What is the function of standardized futures contracts?
What is the function of standardized futures contracts?
What is the relationship between margin and money changing hands at the time the contract is entered into?
What is the relationship between margin and money changing hands at the time the contract is entered into?
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Study Notes
Understanding Futures Contracts
- Futures contracts are standardized and traded on a centralized futures exchange.
- Standardization reduces customization, increases liquidity, and removes the need to verify creditworthiness of trade partners.
- Futures contracts allow speculators and hedgers to gain financial exposure to various assets such as commodities, minerals, metals, energy, interest rates, indexes, and currencies.
- Farmers and millers use futures and forward contracts to plan for the future and reduce uncertainty in markets.
- Speculators seek to profit from price movements, either by going long (believing price will rise) or short (believing price will fall), while hedgers seek protection from price movements.
- Futures contracts are traded on margin, with no money changing hands at the time the contract is entered into.
- Futures exchanges attract a diverse range of traders including banks, corporations, governments, livestock ranchers, investment managers, construction planners, farmers, and food manufacturers.
- Hedgers transfer risk, while speculators absorb that risk, bringing balance to the futures market.
- There are various categories of futures contracts, and they are traded on different exchanges, with both buyers and sellers interacting directly with the exchange/clearinghouse.
- Margin requirements for futures contracts typically range between 3% and 15% of the total contract value, depending on asset price and market volatility.
- Margin deposits are not ownership, but rather funds that will be drawn from or added to over time as the futures contracts are marked to market, ensuring both parties can meet their financial obligations as prices change.
- Investors make or lose money with daily marking to market, where the futures price is adjusted daily based on market movements, ensuring that both parties can meet their financial obligations as prices change.
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