1. © K. Cuthbertson and D. Nitzsche Figures for Chapter 20 FUTURES MARKETS (Investments : Spot and Derivatives Markets)

2. © K. Cuthbertson and D. Nitzsche Figure 20.1 : Types of derivative markets OVER-THE-COUNTER Supplied by intermediaries (banks) Customise4d to suit buyer Can be done for any amount, any settlement date Credit risk of counterparty and expensive to unwind Allows anonymity - important for large deals New contracts do not need approval of regulator EXCHANGE TRADED Traded on exchanges (e.g. LIFFE, CBOT, CME) Available for restricted set of assets Fixed contract sizes and settlement dates Easy to reverse the position Credit risk eliminated by clearing house margining system (‘marking to market’)

3. © K. Cuthbertson and D. Nitzsche Figure 20.2 : Financial futures markets INSTRUMENTS Money Market Instruments 3 month Eurodollar deposit, 90 day US T-bills, 3 month Sterling or Euro deposits Bonds US T-bond, German Bund Stock Indices S&P500, FTSE100 Currencies Euro, Sterling, Yen, etc. Mortgage Pools (GNMA) EXCHANGES CBOT CME NY Futures Exchange Philadelphia Exchange Pacific Stock Exchange LIFFE (London) MATIF (Paris) Eurex (Frankfurt) Singapore, Hong Kong, Tokyo, Osaka Sydney Futures Exchange

4. © K. Cuthbertson and D. Nitzsche Figure 20.3 : Speculation with futures Futures price Profit per contract $10 -$10 0 Long future Short future F 2 = 110 F 2 = 90 F 1 = 100

5. © K. Cuthbertson and D. Nitzsche Figure 20.5 : Arbitrage with futures Stock price S = $100 Safe rate r = 4% p.a. Quoted futures price F = $102 Strategy today Sell futures contract at $102 (receive nothing today) Borrow $100, but stock (= synthetic future) Use no ‘own funds’ 3 months time (T = 1/4) Loan outstanding = $100 (1+0.04/4) = $101 Deliver stocks and receipts from F.C. = $102 Riskless profit = $1