1Charles Cao
2,Futures and Forward Markets
Summary
Contract Specifications
Margin Accounts
Pattern of Futures Prices
2Charles Cao
Contract Specifications
The asset
The contract size
Delivery arrangement
Delivery month
Price quotes
Position limit (1000,300)
Trading Unit 5,000 bu
Deliverable Grades No,2 Yellow at par and substitutions at
differentials established by the exchange
Price Quote Cents and quarter-cents/bu
Tick Size 1/4 cent/bu ($12.50/contract)
Daily Price Limit 12 cent/bu ($600/contract) above or
below the previous day’s settlement price
(expandable to 18 cent/bu)
Contract Months Dec,Mar,May,Jul,Sep
Ticker Symbol C
Corn Futures
3Charles Cao
4Charles Cao
Contract Specifications
Closing out positions
Enter into a contract that is the opposite of
the original contract
An example:
March 6,long one July corn futures contract
April 12,short one July corn futures contract
5Charles Cao
Contract Specifications
Closing out positions (cont.)
Majority of the futures contracts do not
lead to delivery
Your gain or loss is determined by the
change in the futures prices between
March 6 and April 12
6Charles Cao
Margin Accounts
Marking to markets
At the end of each day,the margin account
is adjusted to reflect the investor’s gain or
loss
Maintenance margin
An example:
7Charles Cao
Operation of Margins for a Long Position
in Two Gold Futures Contracts
The contract size is 100 ounces
The price of gold futures is $400 per
pounce
The initial margin requirement is 5%
The initial margin is $2,000 per contract
or $4,000 in total
The maintenance margin is $1,500 per
contract or $3,000 in total
Day Futures
Price
(dollars)
Daily Gain
(Loss)
(dollars)
Cumulative
Gain (Loss)
(dollars)
Margin Account
Balance
(dollars)
Margin
Call
(dollars)
400.00 4,000
June 1 397.00 (600) (600) 3,400
June 2 396.10 (180) (780) 3,220
June 3 398.20 420 (360) 3,640
June 4 397.10 (220) (580) 3,420
June 5 396.70 (80) (660) 3,340
June 8 395.40 (260) (920) 3,080
June 9 393.30 (420) (1,340) 2,660 1,340
June 10 393.60 60 (1,280) 4,060
June 11 391.80 (360) (1,640) 3,700
June 12 392.70 180 (1,460) 3,880
June 15 387.00 (1,140) (2,600) 2,740 1,260
June 16 387.00 0 (2,600) 4,000
June 17 388.10 220 (2,380) 4,220
8Charles Cao
9Charles Cao
Price Quotes
Price quotes
Opening price,the highest price,the
lowest price
Settlement price
Open interest,aggregated long positions
Crude Oil Futures
Charles Cao 10
Open High Low Settle
Dec 32.37 32.37 31.53 31.37
Jan 31.83 31.83 31.11 31.27
Source,Wall Street Journal
11Charles Cao
Pattern of Futures Prices
Futures price converges to the spot
price of the underlying asset as the
delivery month is approached
Arbitrage activity between the futures
and spot markets will make the two
prices equal on the expiration day
Futures
Price
Spot
Price
Time
Relationship between Futures and Spot Prices
12Charles Cao
Futures
Price
Spot
Price
Time
Relationship between Futures and Spot Prices
13Charles Cao
14Charles Cao
Simple vs,Continuous
Compounding
The effect of increasing the compounding
frequency on the value of the $100 at the end of
1 year when the interest rate is r=10% per year
m
m
r )1(100
Compounding Value of the $100 at
Frequency End of 1 Year
Annually (m = 1) 110.00
Semiannually (m = 2) 110.25
Quarterly (m = 4) 110.38
Monthly (m = 12) 110.47
Weekly (m = 52) 110.51
Daily (m = 365) 110.52
Simple vs,Continuous
Compounding
15Charles Cao
16Charles Cao
Continuous Compounding
With Continuous compounding,an
amount $A invested for n years at rate R
grows to
52.1 1 0$1 0 5 2.11 0 0$
1 0 0$
1 0 0$
1.0
y ear 1 %10
e
e
nReA
2,Futures and Forward Markets
Summary
Contract Specifications
Margin Accounts
Pattern of Futures Prices
2Charles Cao
Contract Specifications
The asset
The contract size
Delivery arrangement
Delivery month
Price quotes
Position limit (1000,300)
Trading Unit 5,000 bu
Deliverable Grades No,2 Yellow at par and substitutions at
differentials established by the exchange
Price Quote Cents and quarter-cents/bu
Tick Size 1/4 cent/bu ($12.50/contract)
Daily Price Limit 12 cent/bu ($600/contract) above or
below the previous day’s settlement price
(expandable to 18 cent/bu)
Contract Months Dec,Mar,May,Jul,Sep
Ticker Symbol C
Corn Futures
3Charles Cao
4Charles Cao
Contract Specifications
Closing out positions
Enter into a contract that is the opposite of
the original contract
An example:
March 6,long one July corn futures contract
April 12,short one July corn futures contract
5Charles Cao
Contract Specifications
Closing out positions (cont.)
Majority of the futures contracts do not
lead to delivery
Your gain or loss is determined by the
change in the futures prices between
March 6 and April 12
6Charles Cao
Margin Accounts
Marking to markets
At the end of each day,the margin account
is adjusted to reflect the investor’s gain or
loss
Maintenance margin
An example:
7Charles Cao
Operation of Margins for a Long Position
in Two Gold Futures Contracts
The contract size is 100 ounces
The price of gold futures is $400 per
pounce
The initial margin requirement is 5%
The initial margin is $2,000 per contract
or $4,000 in total
The maintenance margin is $1,500 per
contract or $3,000 in total
Day Futures
Price
(dollars)
Daily Gain
(Loss)
(dollars)
Cumulative
Gain (Loss)
(dollars)
Margin Account
Balance
(dollars)
Margin
Call
(dollars)
400.00 4,000
June 1 397.00 (600) (600) 3,400
June 2 396.10 (180) (780) 3,220
June 3 398.20 420 (360) 3,640
June 4 397.10 (220) (580) 3,420
June 5 396.70 (80) (660) 3,340
June 8 395.40 (260) (920) 3,080
June 9 393.30 (420) (1,340) 2,660 1,340
June 10 393.60 60 (1,280) 4,060
June 11 391.80 (360) (1,640) 3,700
June 12 392.70 180 (1,460) 3,880
June 15 387.00 (1,140) (2,600) 2,740 1,260
June 16 387.00 0 (2,600) 4,000
June 17 388.10 220 (2,380) 4,220
8Charles Cao
9Charles Cao
Price Quotes
Price quotes
Opening price,the highest price,the
lowest price
Settlement price
Open interest,aggregated long positions
Crude Oil Futures
Charles Cao 10
Open High Low Settle
Dec 32.37 32.37 31.53 31.37
Jan 31.83 31.83 31.11 31.27
Source,Wall Street Journal
11Charles Cao
Pattern of Futures Prices
Futures price converges to the spot
price of the underlying asset as the
delivery month is approached
Arbitrage activity between the futures
and spot markets will make the two
prices equal on the expiration day
Futures
Price
Spot
Price
Time
Relationship between Futures and Spot Prices
12Charles Cao
Futures
Price
Spot
Price
Time
Relationship between Futures and Spot Prices
13Charles Cao
14Charles Cao
Simple vs,Continuous
Compounding
The effect of increasing the compounding
frequency on the value of the $100 at the end of
1 year when the interest rate is r=10% per year
m
m
r )1(100
Compounding Value of the $100 at
Frequency End of 1 Year
Annually (m = 1) 110.00
Semiannually (m = 2) 110.25
Quarterly (m = 4) 110.38
Monthly (m = 12) 110.47
Weekly (m = 52) 110.51
Daily (m = 365) 110.52
Simple vs,Continuous
Compounding
15Charles Cao
16Charles Cao
Continuous Compounding
With Continuous compounding,an
amount $A invested for n years at rate R
grows to
52.1 1 0$1 0 5 2.11 0 0$
1 0 0$
1 0 0$
1.0
y ear 1 %10
e
e
nReA
