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1、Chapter 2 Mechanics of Futures Markets,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,1,Futures Contracts,Available on a wide range of assets Exchange traded Specifications need to be defined: What can be delivered, Where it can be delivered, & When it can be deliv
2、ered Settled daily,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,2,Convergence of Futures to Spot (Figure 2.1, page 29),Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,3,Margins,A margin is cash or marketable securities deposited
3、by an investor with his or her broker The balance in the margin account is adjusted to reflect daily settlement Margins minimize the possibility of a loss through a default on a contract,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,4,Margin Cash Flows,A trader ha
4、s to bring the balance in the margin account up to the initial margin when it falls below the maintenance margin level A member of the exchange clearing house only has an initial margin and is required to bring the balance in its account up to that level every day. These daily margin cash flows are
5、referred to as variation margin A member is also required to contribute to a default fund,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,5,Example of a Futures Trade (page 27-29),An investor takes a long position in 2 December gold futures contracts on June 5 contr
6、act size is 100 oz. futures price is US$1,450 initial margin requirement is US$6,000/contract (US$12,000 in total) maintenance margin is US$4,500/contract (US$9,000 in total),Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,6,A Possible Outcome (Table 2.1, page 30),O
7、ptions, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,7,Margin Cash Flows When Futures Price Increases,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,8,Short Trader,Margin Cash Flows When Futures Price Decreases,Options, Futures, and Othe
8、r Derivatives, 9th Edition, Copyright John C. Hull 2014,9,Some Terminology,Open interest: the total number of contracts outstanding equal to number of long positions or number of short positions Settlement price: the price just before the final bell each day used for the daily settlement process Vol
9、ume of trading: the number of trades in one day,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,10,Key Points About Futures,They are settled daily Closing out a futures position involves entering into an offsetting trade Most contracts are closed out before maturity
10、,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,11,Crude Oil Trading on May 14, 2013 (Table 2.2, page 36),Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,12,Collateralization in OTC Markets,It is becoming increasingly common for tr
11、ansactions to be collateralized in OTC markets Consider transactions between companies A and B These might be governed by an ISDA Master agreement with a credit support annex (CSA) The CSA might require A to post collateral with B equal to the value to B of its outstanding transactions with B when t
12、his value is positive.,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,13,Collateralization in OTC Markets continued,If A defaults, B is entitled to take possession of the collateral The transactions are not settled daily and interest is paid on cash collateral See
13、Business Snapshot 2.2 for how collateralization affected Long Term Capital Management when there was a “flight to quality” in 1998.,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,14,Clearing Houses and OTC Markets,Traditionally most transactions have been cleared b
14、ilaterally in OTC markets Following the 2007-2009 crisis, the has been a requirement for most standardized OTC derivatives transactions between dealers to be cleared through central counterparties (CCPs) CCPs require initial margin, variation margin, and default fund contributions from members simil
15、arly to exchange clearing houses,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,15,Bilateral Clearing vs Central Clearing House,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,16,New Regulations,New regulations for trades between d
16、ealers that are not cleared centrally require dealers to post both initial margin and daily variation margin The initial margin is posted with a third party,Options, Futures, and Other Derivatives, 9th Edition, Copyright John C. Hull 2014,17,Delivery,If a futures contract is not closed out before ma
17、turity, it is usually settled by delivering the assets underlying the contract. When there are alternatives about what is delivered, where it is delivered, and when it is delivered, the party with the short position chooses.A few contracts (for example, those on stock indices and Eurodollars) are settled in cash,
