1. Lecture 3

2. Asset Price Profit Loss

3. Asset Price Profit Loss

4. Asset Price Profit Loss

5. Asset Price Profit Loss

6. Asset Price Profit Loss

7. “In The Money” “Out of The Money” Ex. IBMSept45Call

8. “In The Money” “Out of The Money” Ex. IBMSept50Put Decatur County Community Foundation

9. Commodity Futures -Sugar-Corn-OJ -Wheat-Soy beans-Pork bellies Financial Futures -Tbills-Yen-GNMA -Stocks-Eurodollars Index Futures -S&P 500-Value Line Index -Vanguard Index

10. Types of Contracts 1- Spot Contract - A K for immediate sale & delivery of an asset. 2- Forward Contract - A K between two people for the delivery of an asset at a negotiated price on a set date in the future. 3- Futures Contract - A K similar to a forward contract, except there is an intermediary that creates a standardized contract. Thus, the two parties do not have to negotiate the terms of the contract.

11. ForwardFutures Private contract between two parties Traded on an exchange Not standardizedStandardized Usually one specified delivery dateRange of delivery dates Settled at end of contractSettled daily Delivery or final settlement usualUsually closed out prior to maturity Some credit riskVirtually no credit risk Fundamentals of Futures and Options Markets, 6 th Edition, Copyright © John C. Hull 2007 2. 11

12.  Not an actual sale  Always a winner & a loser (unlike stocks)  K are “settled” every day. (Marked to Market)  Hedge - K used to eliminate risk by locking in prices  Speculation - K used to gamble  Margin - not a sale - post partial amount

13.  Long position  Short position ◦ Also called “Short sale” ◦ Defined as  1. An obligation to buy back the contract  2. An obligation to deliver the asset in the future  Asset Short Sale

14.  The amount (percentage) of a Futures Contract Value that must be on deposit with a broker.  Since a Futures Contract is not an actual sale, you need only pay a fraction of the asset value to open a position = margin.  CME margin requirements are 15%  Thus, you can control $100,000 of assets with only $15,000.

15. Example:  You decide to enter into 3 long oil contracts. Each contract has a size of 5,000 barrels. The futures contract price of one barrel of oil is $65. If the margin requirement is 15%, how much money must you put on deposit with your broker?

16. Example:  You decide to enter into 3 long oil contracts. Each contract has a size of 5,000 barrels. The futures contract price of one barrel of oil is $65. If the margin requirement is 15%, how much money must you put on deposit with your broker?

17. Asset Price Profit Loss Charting Futures / Forwards