Futures contracts

Element

• underlying asset, quality
• contract size, not so large, not so small
• expiration date, forward specifies the date, futures just assign month, along with life time(usually less than one year, but euro-dollar futures' life time can be 10 years)

Opening / Closing out a position

Opening

Closing

• offsetting, enter into the opposite position to offset
• real delivery / Cash settlement, inconvenient, expensive
• exchange for physical, few

Margins

• on behalf a promise
• minimize the loss through a default
• marking to market
• can withdraw when benefit
• must maintain the minimum maintenance margin

Delivery

• If not offset before maturity, there is a delivery.
• short party's delivery option
  • what is delivered
  • where it is delivered
  • when it is delivered
• short party's issues notice of intention to deliver

Three critical dates

• the first notice day
• the last trading day, a few days before 3
• the last notice

The clearing house will choose the oldest long position to take deliver.

Convergence of Futures to Spot

futures above spot

arbitrage opportunity:

• short futures
• buy asset
• make delivery immediately

$$profit = futurs' price - spot price$$

tips

• open interest: 敞口，未平仓合约量
• settlement price:
• when a futures contract is traded, the open interest may increase, decrease or stay the same.

Accounting & Tax

• Not for hedge: record when it happen

Forward contracts

• specified date to deliver
• no money changes at first, initial contracts value is zero
• delivery price: K, specified price in a forward contract, remain the same
• forward price is the delivery price that would be applicable to the contract if it were negotiated today, change as time goes by
• forward price equal to forward price at first
• Terminal value for long position: $S_t - K$
• Terminal value for short position: $K-S_t$

Foreign exchange quotes

• futures exchange rates are quoted with USD
• forward

assignments

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