Futures Contracts:PreliminariesStandardizing Features: easy to resellContract Size (exhibit 7.2)Delivery MonthDaily resettlementHigh leverageInitial Margin (about 4% of contract value,cash or T-bills held at your brokers),maintenance margin
Futures Contracts: Preliminaries ❖Standardizing Features: easy to resell ▪ Contract Size (exhibit 7.2) ▪ Delivery Month ❖Daily resettlement ▪ High leverage ▪ Initial Margin (about 4% of contract value, cash or T-bills held at your brokers). ▪ maintenance margin
DailyResettlement:AnExampleSuppose you want to speculate on a rise in the$/ exchange rate (specifically you think that thedollar will appreciate)Currency perU.S.$ equivalentU.S. $WedTueTueWed1401390.007194245Japan (yen)0.0071428571431420.0069930070.0070422541-monthforward1501493-months forward0.0067114090.0066666671601590.006250.0062893086-months forwardCurrently $1 = ￥140. The 3-month forward price is $1FY150
Daily Resettlement: An Example ❖Suppose you want to speculate on a rise in the $/¥ exchange rate (specifically you think that the dollar will appreciate). Currently $1 = ¥140. The 3-month forward price is $1=¥150. Currency per U.S. $ equivalent U.S. $ Wed Tue Wed Tue Japan (yen) 0.007142857 0.007194245 140 139 1-month forward 0.006993007 0.007042254 143 142 3-months forward 0.006666667 0.006711409 150 149 6-months forward 0.00625 0.006289308 160 159
DailyResettlement:AnExampleIf you enter into a 3-month futures contractto sell Yen at the rate of $1 = ￥150 you willmake money if the Yen depreciates.The c0ntract size is ￥12,500,000Your initial margin is 4% of the contractvalue:$1$3,333.33 =.04 ×12,500,000 x150
Daily Resettlement: An Example ❖If you enter into a 3-month futures contract to sell Yen at the rate of $1 = ¥150 you will make money if the Yen depreciates. ❖ The contract size is ¥12,500,000 ❖Your initial margin is 4% of the contract value: 150 $1 $3,333.33 =.0412,500,000
DailyResettlement:AnExampleIf tomorrow, the futures rate closes at $1 :￥149, then your position's value drops.Your original agreement was to sell￥12.500.000 and receive $83.333.33But n0w ￥12.500.000 is worth $83.892.62$1$83,892.62 = 12,500,000 x149You have lost $559.28 overnight
Daily Resettlement: An Example If tomorrow, the futures rate closes at $1 = ¥149, then your position’s value drops. Your original agreement was to sell ¥12,500,000 and receive $83,333.33 But now ¥12,500,000 is worth $83,892.62 149 $1 $83,892.62 =12,500,000 You have lost $559.28 overnight
DailyResettlement:AnExampleThe$559.28comesoutofyour$3.333.33margin account, leaving $2,774.05This is short of the $3,355.70 required for a newposition.$1$3,355.70=.04x12,500,000x149Your broker will let you slide until you runthrough your maintenance margin. Then youmust post additional funds or your position willbe closed out. This is usually done with areversing trade
Daily Resettlement: An Example ❖The $559.28 comes out of your $3,333.33 margin account, leaving $2,774.05 ❖This is short of the $3,355.70 required for a new position. 149 $1 $3,355.70 = .0412,500,000 ⚫Your broker will let you slide until you run through your maintenance margin. Then you must post additional funds or your position will be closed out. This is usually done with a reversing trade