Futures Club, National Taiwan University
Introduction to Futures and Futures Market
Yu Chen-Wen
President of the Futures Club,
National Taiwan University
Department of International Business
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Futures Club, National Taiwan University
Main Concept - Derivatives
•
A financial instrument whose value
depends on (or derives from) the
value of other, more basic
underlying asset.
•
e.g : Futures, Options, Mortgageback securities.
Futures Club, National Taiwan University
What is Futures??
•
Forward contract is an agreement to buy or sell an asset at a certain futures
time for a certain price.
example:
•
Futures contract is alike forward contract, but normally trade on an exchange.
example:
Futures Club, National Taiwan University
Terminology in Futures Market &
How Could We Trade Futures in Taiwan
•
Lot
•
Position
•
Liquidation, Offset
•
Delivery
•
Open Interest
•
Margin
•
Margin Call
•
Settlement Price
An Instance of Futures Market
Futures Club, National Taiwan University
•
Three investors, A, B and C.
•
On Oct.10,2004, A long a TAIEX futures for NT1,000,000(5000 index point *
NT200 per index point) which delivery month is Jan. 2005 and investor B is the
opposite side of this contract.
•
On Nov. 20, the Taiwan Stock Exchange Capitalization Weighted Stock Index is
4500 point.
•
On Dec.5, B want to offset the position.The TAIEX futures which has the same
delivery month is NT 900,000 on that day.
•
On Dec.15, investor C short a TAIEX futures for NT920,000 which delivery
month is Jan. 2005.
•
On the third Wednesday of the Jan,2005. Cash settlement occur.TAIEX is 5200
point.
Futures Club, National Taiwan University
Comparison of forward and futures contracts
•
Forward Contract
•
Futures Contract
a)
b)
c)
Trade on over-the counter market
Not standardized
Usually one specified delivery
date
Settle at the end of contract
Delivery or final cash settlement
usually take place
a)
b)
c)
d)
e)
Trade on an exchange
Standardized contract
Range of delivery dates
Settled daily
Contract is usually close out prior
to maturity
d)
e)
Futures Club, National Taiwan University
Question: why people need futures??
•Hedgers
•Speculators
•Arbitrageurs
Type of Trader
Futures Club, National Taiwan University
Futures Market
•
CBOT(Chicago Board of Trade)
•
London International Financial Futures and Options Exchange
•
SIMEX(The Singapore Exchange)
•
TAIFEX(Taiwan Futures Exchange)
Futures Club, National Taiwan University
The Growth in Futures Market (TAIEX)
Source:TAIEX Website
http://www.taifex.com.tw
Futures Club, National Taiwan University
Futures Category
In TAIEX
I.
TAIEX Futures
II.
Electronic Sector Index Futures
III.
Finance Sector Index Futures
IV.
MiNi-TAIEX Futures
V.
Taiwan 50 Futures
VI.
10-year Government Bond Futures
VII.
30-Day Commercial Paper Interest Rate Futures
Futures Club, National Taiwan University
Futures Category (con’t)
Others
I.
MSCI Taiwan Index Futures
II.
CBOT mini-sized Silver Futures
III.
Corn Futures
IV.
10 Year U.S. Treasury Notes Futures
V.
CBOT Dow Jones U.S. Total Market Index Futures (TMI)
Futures Club, National Taiwan University
Relationship Between Futures Price and Spot Price
Futures price are above spot price
Futures price are below spot price
*Selective Topic
Futures Club, National Taiwan University
Determination of Forward and Futures Price
Asset
Forward/Futures
Price
Value of long forward
contract with delivery
price K
Provide no Income
S0erT
S0 – Ke-rT
Provide known income
with present value I
(S0 – I)erT
S0 – I – Ke-rT
S0e(r-q)T
S0e-qT – Ke- rT
Provide known yield q
T:Time until delivery date in a forward or futures contract (in years)
S0:Price of the asset underlying the forward or futures contract today
F0:forward or futures contract price today
r:Risk-free rate per annum, expressed with continuous compounding
K:delivery price in the contract
Futures Club, National Taiwan University
Determination of Forward and Futures Price In Reality
The only determinant is “Demand & Supply”!!!!
We could to draw support from Technical Analysis
*Selective Topic
Futures Club, National Taiwan University
Hedge Strategies Using Futures
•
Minimum Variance Hedge Ratio
h* = ρ (σS / σF)
σS:Standard deviation of the change in spot
price
σF: :Standard deviation of the change in
futures price
ρ:Coefficient of correlation between the
change in spot and futures price
h*:Hedge ratio that minimize the variance
of the position
*Selective Topic
Futures Club, National Taiwan University
Hedge Strategies Using Futures(con’t)
•
Optimal Number of Contract
N* = [(h*NA) / QF]
NA:Size of position being hedge(unit)
QF:Size of futures contract
N*:Optimal number of futures contracts for
hedging
h*:Hedge ratio that minimize the variance
of the position
Futures Club, National Taiwan University
Case Discussion
•
“Speculation in futures market is
pure gambling. It’s not in the public
interest to allow speculator to trade
on futures exchange.” Do you agree
this statement??
•
Consider a three-month TAIEX
futures, suppose that the underlying
index provides a dividend yield 1%
per annum.The current index point
is 5800 and the risk-free interest
rate is 5%.How much this futures
worth??
Futures Club, National Taiwan University
Reference
TAIEX,http://www.taifex.com.tw/
CBOT,http://www.cbot.com/
TSEC,http://www.tse.com.tw/
“Futures, Options, and Other Derivatives 5
edition” John Hull, Prentice Hall
“Technical Analysis of Financial Market” John
J.Murphy,New York Institute of Finance