Finance School of management Terms Open, High, LoW, Settle, Change, Lifetime high Lifetime low, Oper en interest Mark-to-market Margin requirement Margin call uesTc
6 Finance School of Management Terms ❖ Open, High, Low, Settle, Change, Lifetime high, Lifetime low, Open interest ❖ Mark-to-market ❖ Margin requirement ❖ Margin call
Finance School of management An lllustration You place an order On August 5, the futures price closes 7/4 cents per to take a long bushel lower position in a You have lost 7 /4 cents*5,000 bushels=$362.50 September wheat that day futures contract on The broker takes that amount out of your account August 4, 1991 and transfers it to the future exchange, which The broker requires transfers it to one of the parties who was on the short side of the contract (marking to market) you to deposit an initial margin of o If you do not have enough money in your account to meet the margin requirement (variation $1, 500 in your maintenance margin), you'll receive a margin call account from the broker asking you to add money If you do not respond immediately then the broker liquidates your position at the prevailing market price uesTc
7 Finance School of Management An Illustration ❖ You place an order to take a long position in a September wheat futures contract on August 4, 1991 ❖ The broker requires you to deposit an initial margin of $1,500 in your account ❖ On August 5, the futures price closes 71 /4 cents per bushel lower ❖ You have lost 71 /4 cents*5,000 bushels=$362.50 that day ❖ The broker takes that amount out of your account and transfers it to the future exchange, which transfers it to one of the parties who was on the short side of the contract (marking to market) ❖ If you do not have enough money in your account to meet the margin requirement (variation / maintenance margin), you ’ll receive a margin call from the broker asking you to add money ❖ If you do not respond immediately, then the broker liquidates your position at the prevailing market price
Finance School of management Spot-Futures Price Parity for Gold There are two ways to invest in gold buy an ounce of gold at so, store it for a year at a storage cost of sho, and sell it for S invest so in a 1-year T-bill with return rs and purchase a 1-ounce of gold forward, F, for delivery in 1-year 0-h=r F gold =1 gold(syn) F=(1+r+h)s 0 uesTc
8 Finance School of Management Spot-Futures Price Parity for Gold ❖ There are two ways to invest in gold ▪ buy an ounce of gold at S0 , store it for a year at a storage cost of $hS0 , and sell it for S1 ▪ invest S0 in a 1-year T-bill with return rf , and purchase a 1-ounce of gold forward, F, for delivery in 1-year ( ) 0 0 1 ( ) 0 1 0 r F 1 r h S S S F h r r S S S gold gold syn + f = + f + − − = = = −