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VII: Futures
23: Financial Futures
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Derivative Securities
A derivative is a financial instrument whose underlying security is another financial instrument. Soybean Futures
The underlying security is soybeans. Soybeans are real so soybean futures are NOT Derivatives
T-Bond Futures The underlying security is a Treasury Bond (just
another piece of paper) so this is a derivative security.
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Index Futures
Index Futures The underlying security is an Index. The index is an artificial construct
Dow Jones =13,096.36 (October 31,2012) S&P500 = 1,412.16
The number itself means
nothing
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Index Futures
The deliverable is cash equal to a multiplier times the index on the delivery date.
The contract definition must include a money multiplier
Chapter 23: Financial Futures © Oltheten & Waspi 2012
DJIA Futures (CBOT)
$10 times index Settlement: third Friday of the contract
month Cash Settlement Contracts: March, June, September, &
December
Chapter 23: Financial Futures © Oltheten & Waspi 2012
S&P 500 Futures (CME)
$250 times index Settlement: third Friday of the contract
month Cash Settlement Contracts: March, June, September, &
December
Chapter 23: Financial Futures © Oltheten & Waspi 2012
DJIA ($10) Futures
http://www.cmegroup.com/trading/equity-index/us-index/dow.htmlAccessed October 29, 2011
Buy 10 Jun 12 @ 12030.0
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Example: Buy DJIA Futures
Buy 10 Jun 12 @ 12030 Promise to buy at 10c * $10 * 12030 =
$1,203,000. DJIA currently at 12,231.11 Margin is $10,000 and $8,000 per contract
Chapter 23: Financial Futures © Oltheten & Waspi 2012
BUY 1 DOW JONES INDEX
@ 10797
$107,970
June 16, 06
Example: Buy DJIA Futures
BUY 1 DOW JONES INDEX
@ 10797
$107,970
June 16, 06
BUY 1 DOW JONES INDEX
@ 12030
$120,300
Jun 15, 12
BUY 10 DJIAs
@ 12030
$1,203,000
June 15, 2012
Chapter 23: Financial Futures
Example: Buy DJIA Futures
11,00011,20011,40011,60011,80012,00012,20012,40012,60012,80013,000
$(15,000)
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000 PS = 12,231.11
PF = 12030
10.021,2$.030,1211.231,12*10$
*10 c
c
© Oltheten & Waspi 2012
Chapter 23: Financial Futures © Oltheten & Waspi 2012
BUY 1 DOW JONES INDEX
@ 10797
$107,970
June 16, 06
Example: Sell DJIA Futures
BUY 1 DOW JONES INDEX
@ 10797
$107,970
June 16, 06
SELL 1 DOW JONES INDEX
@ 12030
$120,300
Jun 15, 12
SELL 10 DJIAs
@ 12030
$1,203,000
June 15, 2012
Chapter 23: Financial Futures
Example: Sell DJIA Futures
11,00011,20011,40011,60011,80012,00012,20012,40012,60012,80013,000
$(15,000)
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000
PS = 12,231.11PF = 12030
10.021,2$.030,1211.231,12*10$
*10 c
c
© Oltheten & Waspi 2012
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Hedging with Index Futures
Buying index futures gives you an investment with a beta of 1
Selling index futures gives you an investment with a beta of –1
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Example: Short Hedge
Portfolio of $2,800,000 with a beta of 1.6 Sell DJIA contracts @ 11,200
200.8)-(1.6*11,200*$10
$2,800,000
Value per contract
Portfolio Value Portfolio Beta
Reduce Beta to 0.80
Number of Contracts
Chapter 23: Financial Futures
Hedging with Index Futures
AprilSet Hedge Portfolio of Equities $2,800,000.00
Sell 20 Dec @ 11,200[20 * $10 * 11,200 = $2,240,000]
-Margin
December
Lift Hedge Portfolio of Equities decreases by 16%
Buy 20 Dec @ 10,080[20 * $10 * 10,080 = $2,016,000]
Portfolio Value:
Rate of Return:
10%
© Oltheten & Waspi 2012
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Example: Short Hedge
Portfolio of $2,800,000 with a beta of 1.6 Sell DJIA contracts @ 11,200
400.0) - (1.6 *11200*$10
$2,800,000
Value per contract
Portfolio ValuePortfolio Beta
Reduce Beta to 0
Number of Contracts
Chapter 23: Financial Futures
Market declines 10%
AprilSet Hedge Portfolio of Equities $2,800,000.00
Sell 40 Dec @ 11200[40 * $10 * 11,200 = $4,480,000]
-Margin
December 2006
Lift Hedge Portfolio of Equities decreases by 16%
Buy 40 Dec @ 10,080[40 * $10 * 10080 = $4,032,000]
Portfolio Value:
Rate of Return:
© Oltheten & Waspi 2012
Chapter 23: Financial Futures
Market increases 10%
AprilSet Hedge Portfolio of Equities $2,800,000.00
Sell 40 Dec @ 11200[40 * $10 * 11200 = $4,480,000]
-Margin
December
Lift Hedge Portfolio of Equities increases by 16%
Buy 40 Dec @ 12320[40 * $10 * 123200 = $4,928,000]
Portfolio Value:
Rate of Return:
© Oltheten & Waspi 2012
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Example: Short Hedge (40 contracts)
-$1,000,000
-$500,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
8960 9760 10560 11360 12160 12960
Unhedged Portfolio
Hedged Portfolio
Futures
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Futures
Futures contracts can be defined around any independently verifiable outcome.
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Class Average Futures
Contract $1000 * GPA
Initial Margin $4,000 Is a maintenance margin necessary?
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Fin 300 Futures
Last semester Susan and John traded at 3.0
SELL Price per GPA: 3.0 Name: John Signature John Q
Investor
BUY Price per GPA: 3.0 Name: Susan Signature Susan
Speculator
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Fin 300 Futures
Last semester Susan and John traded at 3.0
Margin: $4,000 Delivery Value: Profit/Loss: Equity:
Margin: $4,000 Delivery Value: Profit/Loss: Equity:
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Fin 300 Futures
End of semester GPA was 3.2
Margin: $4,000 Delivery Value: Profit/Loss: Equity:
Margin: $4,000 Delivery Value: Profit/Loss: Equity:
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Class Average Futures
Current Quote: 3.20
Champaign Urbana Futures Exchange
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Class Average Futures
Champaign Urbana Futures Exchange
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Futures
Iowa Electronics Market Presidential Election Market http://tippie.uiowa.edu/iem/
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Republican Nomination 2012
Chapter 23: Financial Futures © Oltheten & Waspi 2012
Presidential Election 2012
Futures V