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Forward Contracts Forward Contracts Lecture 4: Futures and Forwards: A forward contract is an agreement between two parties in which one party, the buyer (long), agrees to buy from the other party, the seller (short), something (i.e., underlying Markets, Basic Applications, and Pricing asset) at a later date (i.e., maturity date) at a price agreed Principles upon (i.e., delivery or forward prices) today Exclusively over-the-counter The contract is an over-the-counter (OTC) agreement between 2 companies 01135531: Risk Management and Dr. Nattawut Jenwittayaroje, CFA No physical facilities for trading Financial Instrument Faculty of Commerce and Accountancy OTC market consisting of direct communications among major Chulalongkorn University financial institutions 1 2 Futures Contracts Forward Contracts Versus Futures Similar in principle to forward contracts, but a futures contract is traded on an exchange, while a forward contract is traded OTC. Forward contracts Futures the contracts are standardized and specified by the exchange, making trading in a secondary market possible. Trade on OTC markets Traded on exchanges Give up flexibility available in forward contacting for the sake of Not standardized Standardized contract liquidity. Specific delivery date Range of delivery dates Forward contracts: the terms of the contract (contract size, maturity Settled at end of contract Settled daily (by daily date, and etc.) can be tailored to the needs of the traders. marking to market) Delivery or final cash Virtually no credit risk – Futures exchanges provide a mechanism settlement usually takes Usually closed out prior to (known as the clearinghouse) that guarantee that the contract will be place maturity honored. For forwards contracts, creditworthiness of the seller is important. 3 4 Derivatives Markets in Thailand Thailand Futures Exchange pcl. (TFEX) SET50 Index SET 50 Index Futures Futures Contract Single Stock Futures Specifications • For example, ADVANC, PTT, and PTTEP Gold Futures, Silver Futures, and Brent Crude Oil Futures USD Futures Interest Rate Futures SET 50 Index options • Call options • Put options Agricultural Futures Exchange of Thailand (AFET) www.tfex.co.th Futures contracts on Natural Rubber Ribbed Smoked Sheets No 3 at 21 Mar 13 Futures contracts on White Rice 5% Both Options Futures contracts on Tapioca Chip 5 6 The Specification of Futures Contracts Underlying asset Single Stock Futures Contract Particularly for commodity futures, the exchange sets allowable grade of a commodity Specifications Delivery location Place and means of delivery Contract size, e.g. For a crude oil futures contract, 1,000 barrels For the Dow Jones stock index futures, $10 per index point For the SET50 index futures, Baht1,000 per index point For a Eurodollar futures contract, $1 million of a Eurodollar time deposit www.tfex.co.th at 21 Mar 13 Quotation Specify how a price of a futures is quoted. E.g. for the CBOT’s corn 7 futures, prices are quoted in cents per bushel 8 The Specification of Futures Contracts TFEX’s SET 50 Index Futures Delivery months (expiration months) The main delivery months for futures are March, June, September and December. Deliverable or cash settlement contracts Deliverable contract: settled by delivery of the item Cash settlement: settled by the payment of cash SET 50 index spot = 880.7 www.tfex.co.th at 13 Jan 2014 Daily price movement limits Settlement price (SP): this usually is an average of the prices of the last few Prevent large price movement from speculators. trades of the day. The settlement price is used to mark-to-market the position. Position limits The max. no. of contracts that an investor may hold. Volume: A number of contracts traded Open interest (OI): The number of futures contracts outstanding at any given Prevent speculators from having big influence on the market in time. 9 10 TFEX’s Gold & Single Stock Futures TFEX’s USD and Brent crude Futures USD spot = 33.02 www.bot.or.th Gold spot = 19,450 KTB spot = 16.50 11 Brent spot = 106.77*33.02 = 3,525 12 AFET’s Futures Example of Futures Listing on CBOT 13 14 Gold Futures สินคาอางอิง ทองคําแทงที่มีความบริสุทธิ์ 96.5% ขนาดของสัญญา 1 สัญญามีขนาดเทากับ ทองคําน้ําหนัก 50 บาท เดือนที่สัญญาสิ้นสุดอายุ เดือนคู (ก.พ., เม.ย., มิ.ย., ส.ค., ต.ค., ธ.ค.) ใกลที่สุด 3 ลําดับ ชวงราคาซื้อขายขนตั้ ่ํา 10 บาท ตอ 1 สัญญา ชวงการเปลี่ยนแปลงของ ไมเกิน + 20 % ของราคาที่ใชชําระราคาในวันทําการกอนหนา ราคาสูงสุดแตละวัน เวลาซื้อขาย Pre-open : 9:15 - 9:45 Morning : 9:45 - 12:30 Pre-open : 14:00 - 14:30 Afternoon: 14:30 - 16:55 ราคาทใชี่ ้ชําระในวนสั ุดท้าย วันทําการกอนวันทําการสุดทายของเดอนทื ี่สัญญาสิ้นสุดอายุ โดย ในวันนั้น สัญญาที่จะหมดอายุจะซื้อขายไดถ ึงเวลา 16.30 น. 15 16 กราฟแสดงราคาทองคาํ spot กบั ราคาทองคาฟํ ิวเจอร์ส ราคา Gold Spot 13 มค. 2557 ราคา Gold Futures 13 มค. 2557 17 18 การทากํ าไรในตลาดขาขํ ้ึน GFM10 เปรียบเทียบทองคาํ (spot) กบั โกลดฟ์ ิวเจอร์ส (futures) ซื้อ มูลคา 19,900 ทองคาํ โกลดฟวเจอร ส 196,000 เงินลงทนชุ ําระเงินเต็มมลคู าวางเงินค้ําประกันประมาณ 10% การสงมอบสินคาสงมอบจรงชิ ําระเปนเงินสด ขาย มูลคา 19,600 199,000 กลยุทธการทํากําไร ทํากําไรไดเฉพาะขาขึ้นทํากําไรไดทั้งขาขึ้นและขาลง ราคาซื้อขาย ประกาศโดยสมาคมผูคาทอง เปลี่ยนแปลงตลอดวนตามการซั ื้อขาย ในตลาด ระยะเวลาการลงทุน ระยะกลาง-ยาว ระยะสั้นวันตอว นั กาไรํ = 199,000 – 196,000 = 3,000 เงินลงทุน 15,000 กาไรรํ ้อยละ 20% เงนประกิ นั 19 20 การทากํ าไรในตลาดขาลงํ Clearinghouse GFM10 19,600 The futures exchange provides a clearing mechanism. Without a clearinghouse, traders will face a counter-party ซื้อ มูลคา risk 192,500 With clearing house, each trader only has an obligation with ขาย มูลคา the clearinghouse 196,000 The clearinghouse becomes 19,250 The seller of the contract for the long position The buyer of the contract for the short position กาไรํ = 196,000 – 192,500 = 3,500 The clearinghouse’s position nets to zero เงินลงทุน 15,000 กาไรรํ ้อยละ 23% 21 22 Clearinghouse Clearinghouse 23 24 Margin Account Daily Settlements (Marking to Market) Furthermore, the profit/loss on a futures contract is settled daily. Since each trader has an obligation with the exchange, and futures contracts expose to risk of loss. Winning party To protect the exchange from a possible loss on a futures contract, the The surplus (above initial margin) from its account can be exchange requires each trader to deposit an initial margin. withdrawn. The initial margin (deposit) is usually required between 5% to 15% of Otherwise, interest is paid on the funds left in this account. the total value of the contract. For example, for SET50 index futures, the Losing party initial margin is 85,000 per contract, or about 85,000/(1,000*880) = 10.4%. Additional payments if the value of the position falls below During the life of a contract, the trader must maintain their account maintenance margin above maintenance margin level, e.g., 5% of the total value of the contract. For SET50 index futures, the maintenance margin is 60,000 per Marking to market can be more than one time per day (i.e., contract, or about 60,000/(1,000*880) = 6.8%. Intra-day margin call) When falls below the maintenance level, they will receive a margin For a forward contract, the profit/loss is realized and settled only call and is requested to top up the margin account to the initial margin once at the maturity. level. 25 26 Day Future Daily gain/loss Margin account balance Margin Example Price for LONG positions call Suppose that the SFE SPI 200 index futures contract is now 0 3,500 $8,750 traded at 3,500 index points. Its contract size is $25 per index 1 3,600 100×25= $2,500 $11,250 2 3,700 100×25= $2,500 $13,750 point. The initial and maintenance margins for each contract 3 3,650 -50×25= -$1,250 $12,500 are 10% and 5% of the value of the contract respectively. Day Future Daily gain/loss Margin account balance Margin Initial margin = 10% $87,500 (3,500$25 ) = $8,750 Price for SHORT positions call 0 3,500 $8,750 Maintenance margin =5% $87,500 (3,500$25 ) = $4,375 1 3,600 -100×25= -$2,500 $6,250 - 2 3,700 -100×25= -$2,500 $3,750 $5,000 3 3,650 50×25= $1,250 $1,250+$8,750=$10,000 - 27 28 Closing Out Positions (Reversing Trading) Closing Out Positions and Open Interest A trader can close out a position at anytime before the settlement date. The number of contracts outstanding (i.e. number of either long or short contracts outstanding) Closing out a long position Almost all traders (i.e., about 99%), however, liquidate (i.e., taking an a short position on the same contract. closeout) their positions before the contract maturity date. A trader bought a June interest rate future contract at 3,200. If in April, the interest rates futures are traded at 3,300.this Futures contracts rarely result in actual delivery of the trader can close out the position and realise the profit by underlying asset. selling (shorting) the contract. The fraction of contracts that result in actual delivery is estimated to range from less than 1 to 3%, depending on the commodity and the activity in the contract. Closing out a short position taking a long position on the same contract. 29 30 Day Future Daily gain/loss Margin account balance Margin Price for LONG positions call Forward Contracts Versus Futures 0 3,500 $8,750 1 3,600 100×25 = $2,500 $11,250 The old Forward contracts Futures 2 3,700 100×25 = $2,500 $13,750 LONG -50×25= - $1,250 trader sells 3 3,650 $12,500 - $12,500 the futures Trade on OTC markets Traded on exchanges contract to 3 3,650 $9,125 Not standardized Standardized contract a new 4 3,600 -50×25 = -$1,250 $7,875 LONG Specific delivery date Range of delivery dates trader. Day Future Daily gain/loss Margin account balance Margin Settled at end of contract Settled daily Price for SHORT positions call Delivery or final cash Usually closed out prior to 0 3,500 $8,750 settlement usually takes maturity 1 3,600 -100×25= -$2,500 $6,250 - place 2 3,700 -100×25= -$2,500 $3,750 $5,000 3 3,650 50×25= $1,250 $1,250+$8,750=$10,000 - The clearinghouse and margin account show how 4 3,600 50×25= $1,250 $11,250 31 daily settlement and closing-out positions work 32 Open Interest and Volume Open Interest and Volume Consider the following example on how to compute open interest and volume.
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