Futures - notions

THE NOTIONS ABOUT THE FUTURES MARKETS

Basis value: The difference between the futures price and the spot price of the commodity.

Contango: The futures price can be above the spot price. This is called contango. In this situation the speculators hold the short position, the hedgers hold the long position. The speculators have the gain as the difference between the futures price and the spot price in return of the risk that they undertook.

Conversion : It is formed by selling call option , by buying sell option and by holding long position in the futures markets.

Futures pricing

THE FORMATION OF THE FUTURES PRICES

If we suppose that there are not any restrictions about the short sales and any trading commissions , there is a cost of carry relationship between the futures markets and the spot market. This relationship can be showed by this equation:

Fo,t = So(1+c)

Fo,t= the futures price at t= 0 for the delivery time t

So= the spot price of the commodity at t= 0

c= cost of the carry of the commodity until the expiration date(% of the spot price)

If this equilibrium is unbalanced the investors have the arbitrage possibility.

If So < Fo,t the investor buy the commodity from the spot the by borrowing and sell the futures contracts. At the expiration date they delivery the commodity in return of the futures contracts and they have the gain.This situation is showed in table 1:

Futures markets - history

HISTORY OF THE FUTURES MARKETS

     The first standard futures contracts were traded regularly at the end of 17 th century in Dojima exchange in Japan. In 1848 the cereal traders have founded the Chicago Board of Trade which will be lead to the futures markets. The objective of the foundation of this exchange was to eliminate the negative influence created by the volatility in the supply and demand quantities and to provide that the quality of the goods will be in certain level. The first regulation was formed in May 1865. The Chicago Produce Exchange in which the eggs and the other agricultural commodities were traded was founded in 1874. The date of foundation of the Chicago Mercantile Exchange (CME) which will issue the financial futures instruments afterward , is 1919.

       The foreign currencies futures contracts which were the first financial futures contracts were issued in CME in 1972. In 1975 the Chicago Board of Trade issued the futures contracts about Government National Mortgage Association (GNMA) paper. These were followed by the T-Bill futures contracts (1977) and Eurodollar futures contracts (1981 CME).

        In 1982 the stock indices have begun to be used in the futures markets :The Chicago Mercantile Exchange has issued the S&P 500 futures contracts . The Value Line index futures contracts have began to be used in Kansas City Board Of Trade and the NYSE index futures contracts in New York Stock Exchange. The first futures contracts in Europe were The Financial Times Stock Exchange (FT-SE 100) futures contracts which were traded in London International Futures Exchange in 1984.

The numbers of the stock index futures contracts traded in 1984 and in 1995 were 39,4 million and 176,5 million consecutively. The ratio of stock index futures contracts to financial futures contracts was 13,6%.

Futures markets - why

THE REASONS OF PREFERENCE OF THE FUTURES MARKETS


The futures markets are preferred due to three reasons:
- to have an opinion about the future price of the commodities

- to hedge his investment

- to speculate

Futures markets - properties

THE PROPERTIES OF THE FUTURES MARKETS

The futures markets are the special forms of the forward markets. There are several differences between two markets. The most important differences are:

The organized exchange
The standard contracts
The margin
The Clearinghouse
The transfer right and the delivery