Download - Futures
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Accounting
Futures
Contracts and Clearing
A
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Chapter 21: Futures © Oltheten & Waspi 2012
Futures Spot
immediate delivery and payment (settlement is generally within three business days)
Forward Delivery and payment at some specified future date
Future Delivery and payment at some specified future date The contract is standardized so that the identity of
the buyer or seller is immaterial. The only thing that needs to be negotiated is the
price.
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Chapter 21: Futures
Soybean Futures
5,000 bushels No 2 yellow soybeans
with a maximum of 14% moisture
For deliveryNovember
(November 1510:01 am Chicago)
Buy at: ________ ¢ per bushel
Soybean Futures
5,000 bushels No 2 yellow soybeans
with a maximum of 14% moisture
For deliveryNovember
(November 1510:01 am Chicago)
Sell at: ________ ¢ per bushel
431 431
The Contract
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Chapter 21: Futures © Oltheten & Waspi 2012
Susan Speculator George Q. FarmerBuy 10 Nov Soybean contracts@ 431
Sell 10 Nov Soybean contracts@ 431
In November Susanwill take delivery of 10*5,000 = 50,000 bushelswill pay 10*5,000*431 = $215,500
In November Georgewill deliver 10*5,000 = 50,000 bushels of soybeanswill receive 10*5,000*431 = $215,500
Open Interest is 10 contracts
The Contract
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Chapter 21: Futures © Oltheten & Waspi 2012
Contract Risk Since settlement is months away there is
always an incentive to renege on the contract by one of the contract parties.
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Chapter 21: Futures © Oltheten & Waspi 2012
Susan Speculator George Q. Farmer
Buy 10 Nov Soybean contracts@ 431[$215,500]
Sell 10 Nov Soybean contracts@ 431[$215,500]
Contract Risk (price drops to 400)
The soybeans Susan has promised to buy are worth $200,000
If I renege then I save myself the
$15,500 loss
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Chapter 21: Futures © Oltheten & Waspi 2012
Susan Speculator George Q. Farmer
Buy 10 Nov Soybean contracts@ 431[$215,500]
Sell 10 Nov Soybean contracts@ 431[$215,500]
Contract Risk (price rises to 500)
The soybeans George has promised to sell are worth $250,000
If I renege then I save myself the
$34,500 loss
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Chapter 21: Futures © Oltheten & Waspi 2012
Contract Risk As soon as the price moves the contract is
at risk
If the price goes down then honoring the contract
loses me money
If the price goes up then honoring the contract
loses me money
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Chapter 21: Futures © Oltheten & Waspi 2012
Contract Risk A successful market for Futures contracts
must guarantee that buyers and sellers honor their agreements, regardless of subsequent price movements.
This is the role of the Clearinghouse
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Chapter 21: Futures © Oltheten & Waspi 2012
The Clearinghouse The Clearinghouse, in order to guarantee
delivery Imposes an initial margin on both buyers and
sellers Marks to Market at the close of trading every
trading day Imposes daily maintenance margin on both
buyers and sellers
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Chapter 21: Futures © Oltheten & Waspi 2012
Contract Definition On the CBOT Soybean future contract
One contract is 5,000 bushels #2 yellow soybeans
Initial margin is $810 per contract Maintenance margin is $600 per contract Price limit of 45¢ per day
The Exchange defines the contract
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Chapter 21: Futures
The Contract
November 15
DeliverySell pay $8100 for the contract
Buy pay $8100 for the contract
Deliver 50,000 bushels receive $215,500 for the soybeans
Take delivery of 50,000 bushels pay $215,500 for the soybeans
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Chapter 21: Futures © Oltheten & Waspi 2012
Example In the following example we will follow the
actions of the Clearinghouse as prices change Day 1: 431 Day 2: 441 Day 3: 442 Day 4: 430 Day 5: 436 Day 6: 436
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Chapter 21: Futures
Example
Sell 10 * 5,000 bushels soybeans at
431[$215,500]
Buy 10 * 5,000 bushels soybeans at
431[$215,500]
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Chapter 21: Futures
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100
Susan: Initial Margin
Initial Margin is deposited to margin account
Which creates Equity
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Chapter 21: Futures
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark toMarket $5,000 $5,000 $13,100
Susan: day 2
$8,100.+5,000.
$13,100.
Equity:If Susan could sell her contract at 441
she would get … her margin back ($8,100)
plus profit ($5,000)$13,100.
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Chapter 21: Futures © Oltheten & Waspi 2012
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark toMarket $5,000 $5,000 $13,100
442[$221,000]
Mark toMarket $500 $5,500 $13,600
Susan: day 3
$13,100.+500.
$13,600.
$8,100.+5,500.
$13,600.
Day-to-day Since inception
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Chapter 21: Futures © Oltheten & Waspi 2012
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark toMarket $5,000 $5,000 $13,100
442[$221,000]
Mark toMarket $500 $5,500 $13,600
430[$215,000]
Mark toMarket - $6,000 - $500 $7,600
$13,600.-6,000.$7,600.
$8,100. -500.$7,600.
Day-to-day Since inception
Susan: day 4
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Chapter 21: Futures © Oltheten & Waspi 2012
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark toMarket $5,000 $5,000 $13,100
442[$221,000]
Mark toMarket $500 $5,500 $13,600
430[$215,000]
Mark toMarket - $6,000 - $500 $7,600
436[$218,000]
Mark toMarket $3,000 $2,500 $10,600
Susan: day 5
$7,600.+3,000.
$10,600.
$8,100.+2,500.
$10,600.
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Chapter 21: Futures © Oltheten & Waspi 2012
Buy 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441 [$220,500]
Mark toMarket $5,000 $5,000 $13,100
442[$221,000]
Mark toMarket $500 $5,500 $13,600
430[$215,000]
Mark toMarket - $6,000 - $500 $7,600
436[$218,000]
Mark toMarket $3,000 $2,500 $10,600
Sell 10 @ 436 [$218,000] $0 $2,500 -$10,600 0
Susan: Close
margin back: $8,100.plus profit: $2,500.
$10,600.
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Chapter 21: Futures © Oltheten & Waspi 2012
Susan Susan has earned a profit of $2500 on an
initial investment of $8,100
That’s a return of 30.9% over 5 days. If I annualize that…
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100
George: Initial Margin
Initial Margin is deposited to margin account
Which creates Equity
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to Market - $5,000 - $5,000 $3,100
This is below the maintenance level of $600 per contract so George gets a margin call.
George: Maintenance Margin
$8,100.-5,000.$3,100.
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price Action
Profit Deposit toMarginAccount Equity
Day’s Cumulative
431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to MarketMargin Call
-$5,000 -$5,000$5,000
$3,100$8,100
The margin call requires George to bring his equity back to the initial level of $810 per contract.
George: Margin Call
$3,100.+margin call.
$8,100.
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to MarketMargin Call -$5,000 -$5,000 +$5,000
$3,100$8,100
442[$221,000]
Mark toMarket -$500 -$5,500 $7,600
Equity is still above the maintenance level so no margin call.
$8,100. -500.$7,600.
$13,100.-$5,500.$7,600.
George: day 3
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to MarketMargin Call
-$5,000 -$5,000+$5,000
$3,100$8,100
442[$221,000]
Mark toMarket - $500 - $5,500 $7,600
430[$215,000]
Mark toMarket +$6,000 + $500 $13,600
George: day 4
$7,600. +6,000.$13,600.
$13,100.+500.
$13,600.
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to MarketMargin Call
- $5,000 - $5,000$5,000
$6,100$8,100
442[$221,000]
Mark toMarket -$500 -$5,500 $7,600
430[$215,000]
Mark toMarket + $6,000 + $500 $13,600
436[$218,000]
Mark toMarket - $3,000 - $2,500 $10,600
$13,600. -3,000.$10,600.
$13,100.-$2,500.$10,600.
George: day 5
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]
Price ActionProfit Margin
Account EquityDay’s Cumulative431 Initial Margin 0 0 $8,100 $8,100441[$220,500]
Mark to MarketMargin Call
- $5,000 - $5,000$5,000
$6,100$8,100
442[$221,000]
Mark toMarket -$500 -$5,500 $7,600
430[$215,000]
Mark toMarket
+ $6,000 + $500 $13,600
436[$218,000]
Mark to MarketWithdrawal
- $3,000 - $2,500-$2,500
$10,600$8,100
George: Withdrawal
$10,600.-Withdrawal.
$8,100.
Equity is still above the maintenance level so no margin call.
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Chapter 21: Futures © Oltheten & Waspi 2012
George George has, in total, deposited $10,600 to
margin.
I am paying $10,600 to avoid the risk on my
soybeans
$8,100. +5,000 -2,500.$10,600.
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse
What happens to George when Susan wants to close her position?
Sell 10 contracts
Buy 10 contracts
I want my $2,500 profitI want out.
I grow soybeans.I need those contracts
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse
What happens to George when Susan wants to close her position?
The Clearinghouse cancels offsetting positions
Sell 10 contracts
Buy 10 contractsSell 10 contracts
Buy 10 contracts
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse
The Clearinghouse cancels offsetting positions.
Sell 10 contracts
Buy 10 contractsSell 10 contracts
Buy 10 contracts
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse
The Clearinghouse cancels offsetting positions, allowing Susan to walk away with her profit/loss matches George’s sell to John’s buy.
$2,500.
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse Technically, Susan, George, and John have
contracts, not with each other, but with the Clearinghouse.
George:Sell 10 Soybeans$215,500
John:Buy 10 Soybeans$218,000
Susan:Buy 10 Soybeans $215,500
Clearinghouse
Sell 10 Soybeans$218,000
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Chapter 21: Futures © Oltheten & Waspi 2012
Clearinghouse Without the Clearinghouse
Susan would have to wait until November Take delivery of 50,000 bushels of soybeans
and pay $215,500 Deliver 50,000 bushels of soybeans and receive
$218,000 The Clearinghouse allows her to realize her
profits now without ever having to touch any soybeans
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Chapter 21: Futures © Oltheten & Waspi 2012
Delivery The contract trades until the business day
before the 15th of the month The contract delivers two business days
after trading stops. On the last day of trading
the futures price is 400¢ The spot price is $4.00 At delivery the Basis (spot – future) is 0
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Chapter 21: Futures
Sell 10 @ 431 [$215,500]Total Margin deposited to date - $10,600Deliver 50,000 bushels of soybeans on contract Margin
Delivery$10,600
$215,500Total income from soybean farming $215,500
George: Deliver
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Chapter 21: Futures © Oltheten & Waspi 2012
Sell 10 @ 431 [$215,500]Total Margin deposited to date - $10,600Buy 10 @ 400 [$200,000]on the last day of trading
MarginProfit
$10,600$15,500
Sell 50,000 bushels of soybeans on the spot market @$4.00 $200,000Total income from soybean farming $215,500
George: Reverse
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Chapter 21: Futures © Oltheten & Waspi 2012
Futures Contracts Less than 2% of futures contracts actually
deliver Even George finds it easier to sell his
soybeans to his local grain elevator than to deliver to Chicago.
George uses futures contracts, not to sell soybeans, but to reallocate his price risk on soybeans to someone else.
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Chapter 21: Futures © Oltheten & Waspi 2012
Price Limits Price limit (CBOT Soybeans): 45¢ per day
400400 445
355
445 490
400
490 535
445Can trade at 500
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Chapter 21: Futures © Oltheten & Waspi 2012
Futures Hedge Speculate Arbitrage
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Futures I