Podcast
Questions and Answers
What is a characteristic of the futures market?
What is a characteristic of the futures market?
- It only exists for certain types of underlying assets. (correct)
- It operates without any contract rigidity.
- It completely replaces spot markets.
- It features standardized forward contracts. (correct)
Which function does the Clearing House NOT perform?
Which function does the Clearing House NOT perform?
- Centralization of exchanges.
- Daily margin calls to manage potential losses.
- Settlement of all contract negotiations. (correct)
- Daily valuation for counterparty risk management.
How is counterparty risk typically managed in OTC markets?
How is counterparty risk typically managed in OTC markets?
- By eliminating the need for margin calls.
- Through regulatory oversight only.
- By utilizing a single standardized contract.
- Via bilateral netting and collateralization. (correct)
In futures contracts, what element is NOT typically standardized?
In futures contracts, what element is NOT typically standardized?
What is the primary role of a Clearing House in futures trading?
What is the primary role of a Clearing House in futures trading?
What is the primary function of a clearing house in the context of futures contracts?
What is the primary function of a clearing house in the context of futures contracts?
Which of the following is NOT one of the three objectives of the G20 after the great crisis?
Which of the following is NOT one of the three objectives of the G20 after the great crisis?
What are the methods of settlement for a futures contract?
What are the methods of settlement for a futures contract?
What does the term 'basis' refer to in the futures market?
What does the term 'basis' refer to in the futures market?
Which of the following represents a potential difficulty associated with clearing houses?
Which of the following represents a potential difficulty associated with clearing houses?
What is the consequence of a futures price being higher than the spot price just before the expiry of the contract?
What is the consequence of a futures price being higher than the spot price just before the expiry of the contract?
Which regulatory body in the US is responsible for overseeing commodity futures trading?
Which regulatory body in the US is responsible for overseeing commodity futures trading?
What happens at the expiry of a futures contract?
What happens at the expiry of a futures contract?
Which of the following statements accurately describes the standardization of futures and forward contracts?
Which of the following statements accurately describes the standardization of futures and forward contracts?
What is a key feature of the liquidity in futures markets compared to forward markets?
What is a key feature of the liquidity in futures markets compared to forward markets?
How does the initial outlay differ between futures and forward contracts?
How does the initial outlay differ between futures and forward contracts?
What aspect of hedging differentiates futures from forward contracts?
What aspect of hedging differentiates futures from forward contracts?
Which of the following best captures the role of clearing houses in futures markets?
Which of the following best captures the role of clearing houses in futures markets?
What is the primary method of settlement for futures contracts compared to forwards?
What is the primary method of settlement for futures contracts compared to forwards?
Which of the following transactions is not a characteristic of futures markets?
Which of the following transactions is not a characteristic of futures markets?
Which of the following is a typical historical evolution of futures markets?
Which of the following is a typical historical evolution of futures markets?
Study Notes
G20 Objectives After The Great Crisis
- Increase transparency
- Mitigate systemic risk
- Fight market abuse
Regulatory Reforms Post Great Crisis
- Global reforms coordinated by the Financial Stability Board (FSB)
- US: Dodd-Frank and Commodity Futures and Trading Commission (CFTC)
- Europe: European Market Infrastructure Regulation (EMIR) and European Securities and Markets Authority (ESMA)
Potential Difficulties Related To Clearing Houses
- "Too big to fail" clearing houses present a moral hazard risk
- Clearing houses may encourage greater risk-taking
- Costs associated with clearing houses:
- Learning costs
- Treasury costs
- Unbalanced markets for collateral assets
Futures Contract Conclusion
- Physical delivery
- Compensation (countertrade)
- Cash settlement
Basis Convergence
- Basis is the difference between future prices (F) and spot prices (S)
- The basis converges at the expiry of the contract (T): F(T,T) = S(T)
- Arbitrage opportunities arise when F(T,T) ≠S(T)
- Example:
- Physical price: 140
- Futures price: 145
- Profit: 5 (Sell futures and buy physical)
- Consequence of arbitrage: Equality between physical and futures prices is restored through price adjustments
Role of The Futures Market
- Standardized forward contracts traded on the futures market
- Key details of contracts: Quality, volume, location, and date of delivery
- Rigidity of contracts
Clearing House Roles
- Liquidity function: Centralization of exchanges
- Counterparty risk management:
- Daily settlement prices
- Margin calls
- Payment of profits and losses
- Deposit payment required for transactions
Counterparty Risk Management in OTC Markets
- Bilateral netting
- Collateralization / Initial Margin
- Revaluation of collateral and margin call
- Cleared OTC products through clearing houses
Differences Between Forwards and Futures
| Futures | Forwards |
|---|---|
| Standardized transactions | Non-standardized transactions |
| Exceptional expiration with effective delivery | Normal expiration with effective delivery |
| Ample liquidity | Almost zero liquidity |
| Initial outlay includes deposit and margin calls | No initial payment required |
| Imperfect hedging, inexpensive, and reversible | Perfect hedging, costly, and irreversible |
Brief History of Futures Markets
- Cereals
- Non-ferrous metals
- Tropical products
- Oilseed
- Animals
- Currencies
- Financial fixed income
- Petroleum products
- Equity Indices
Key Dates for Derivative Markets
- 1850 – 1930: Forward market on agricultural products
- 1930 – 1970: Futures markets on raw materials
- 1970-1985: Futures markets on financial assets
- 1985-2000: The era of OTC markets
- 2000-…..: Towards a new organization of derivatives markets
Spot, Forward, and Futures Prices
- Physical Market:
- Immediate delivery: Spot transaction, Spot price
- Delayed delivery: Forward transaction, Forward price
- Contract Market: Futures transaction, Futures price
- Standardized
- Multiple futures prices for various delivery dates
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Description
Explore the objectives and regulatory reforms initiated by the G20 after the Great Crisis. This quiz covers key topics such as transparency, systemic risk mitigation, and the challenges faced by clearing houses. Test your understanding of futures contracts and basis convergence as well.
