Chapter 14 - Futures Contracts

These flashcards cover key vocabulary and concepts related to futures contracts and trading.

Futures Contract

An agreement made today between a buyer and a seller obligated to complete a transaction at a set date in the future.

Forward Contract

An agreement made today between a buyer and a seller obligated to complete a transaction in the future, with customized terms.

Forward Price

The price at which the trade will occur, determined when the forward contract is made.

Cash Price (Spot Price)

The price for immediate delivery of a commodity or financial instrument.

Futures Price

The price at which the trade will occur in a futures contract, determined in the market.

Margin

The initial deposit required to open a futures trading account, as well as the maintenance margin to keep it open.

Hedging

The practice of trading futures contracts to transfer price risk.

Speculation

The practice of buying or selling futures contracts to profit from anticipated price changes.

Short Hedge

Selling futures contracts to protect against a decline in the price of an asset.

Long Hedge

Buying futures contracts to protect against an increase in the price of an asset.

Cash-Futures Arbitrage

Earning risk-free profits from an unusual difference between cash and futures prices.

Basis

The difference between the cash price and the futures price of a commodity.

Inverted Market

A market condition where the cash price is greater than the futures price, resulting in a positive basis.

Carrying Charge Market

A market condition where the cash price is less than the futures price, resulting in a negative basis.

Spot-Futures Parity

The relationship that must hold between spot prices and futures prices to prevent arbitrage opportunities.

Index Arbitrage

Trading stock index futures and underlying stocks to exploit deviations from spot-futures parity.

Cross-Hedging

Hedging a position in one commodity with futures contracts on a related but different commodity.

Futures Exchange

A marketplace where futures contracts are traded, such as the Chicago Board of Trade or the New York Mercantile Exchange.