1 - futures

what is a future

a contract between two parties to make or take delivery of:

• a specific quantity + quality…

• …of a specified asset

• on a fixed future date

• at a price agreed today

what is making delivery

selling/shorting

what is taking delivery

buying/long

what is the specific quantity known as

the contract size

what does specific mean with regards to quantity

its discrete not continuous, so u might not get exactly what u want, u might need to over or under hedge

what is the specific quality known as

deliverable grade

who specifies the contract size + deliverable grade

the exchange

if you want more flexibility, you should enter a…

…forward agreement, not a future (since these are OTC so the exchange doesn’t decide things)

what is the price of the future known as

the contract price

who decides the price

not the exchange - the parties in the contract

what is a tick size in general

the minimum amount that an index is allowed to move in

FTSE tick size

0.5 index points

on the FTSE, what does 1 index point represent

£10

so what is the tick size on the ftse in money terms

£5

what is a tick size in terms of futures specifically then

the smallest amount by which the future’s contract price is allowed to move

what is the tick value

how much money you gain or lose when the contract price moves by one tick

how to calculate tick value

the contract’s multiplier x tick size

what is the future date known as

delivery date

or

contract month

what are the 4 main contract months

march

june

sep

dec

what are these dates also known as

IMM dates

(IMM = international monetary markets)

what week in these months are futures normally delivered

third week

how are index futures settled

cash settled (not physically delivered - this never really happens tbf)

if u are worried that an index will FALL, you will do a…

…down bet/sell/short future (all mean the same thing)

what is the max profit for a short future

the price at which u agreed to sell the underlying, since it could fall to 0

what is the max loss for a short future

unlimited since it can rise to any price

how about for a long future

all vice versa

when there is a whole general consensus to either buy or sell

market makers will take the other side of the trade, but they will make sure they get a rly good price for going against what is probs best

what is a near/front month

the one out of mar/jun/sep/dec that is currently next up

a near/front month has the most…

…liquidity

why do near/front months have the most liquidity

the further into the future you go, the more uncertainty there is

so what is the best way to hedge

to do the future just up till the near/front month, then roll into the next + repeat rather than entering one big contract

futures are very much for ___________, but now ppl also use them for ______________

futures are very much for hedging, but now ppl also use them for speculation

give an example of hedging with a future

if you have an existing long position, then you become uncertain, you can take out a short future in order to balance out to zero anything you might lose/gain

what is strip holding

holding a series of futures contracts with different delivery dates at the same time

what is stack hedging

putting your hedge into the nearest available futures contract first, then rolling it into later contracts as time passes (the near/front month thing prev discussed)

with stack hedging, what concept is used by the market makers who ppl r trading futures with

trading the mid

what is trading the mid

using the middle of the bid offer so u don’t have to keep crossing the spread every time you roll a contract over

so how does the market maker make money if they are trading the mid

by charging fees, but not through a spread

what is the cost of a futures contract

zero cost at inception

if a future is zero cost at inception, what kind of transaction is it

contingent liability —> since any loss is more than u invested

what is a contingent liability

a transaction where you can lose more than you invested

what do you have to pay to buy/sell a future though

a margin (cashflow)

what is LIFFE

london international financial futures + options exchange

what is ICE

intercontinental exchange

what happened with LIFFE and ICE

LIFFE is now a part of ICE

what is ICE futures

the part of ice that specifically deals with futures

what else can futures be used for (apart from hedging and speculation)

arbitrage

3 types of arbitrage with futures

intertemporal

geographic

value-chain

intertemporal arbitrage

price differences between different delivery months

geographic arbitrage

price differences across different exchanges

value-chain arbitrage

price differences between crude oil and the resulting refined products (that are cracked from crude oil)

what is value chain arbitrage also known as

trading the crack spread

when you can arbitrage in any of these ways, its because the prices are…

…’out of line’

what is a forward

similar to a future but it’s traded OTC

what is a CFD

contract for difference:

• type of cash settled futures contract

• spread betting (no real capital gains, just about price changes)