Definitions of Terms Long Position(多头) The agreement to buy the item (from the person taking the short position) Short Position(空头) The agreement to sell the item (to the person taking the long position) THE COURSE OF FINANCE 2017 SPRING SJTU 6
Definitions of Terms Long Position(多头) The agreement to buy the item (from the person taking the short position) Short Position（空头） The agreement to sell the item (to the person taking the long position) THE COURSE OF FINANCE 2017 SPRING SJTU 6
Using Forward and Futures Contracts to Hedge Risks Traditionally,no payment is made on a forward contract until the settlement date(交割日) If the parties to a forward contract do not trust the other,then add clauses to provide a sureties to a stakeholder periodically render contract valueless by making cash settlement equal to its current market value THE COURSE OF FINANCE 2017 SPRING SJTU
Using Forward and Futures Contracts to Hedge Risks Traditionally, no payment is made on a forward contract until the settlement date（交割日） If the parties to a forward contract do not trust the other, then add clauses to provide a sureties to a stakeholder periodically render contract valueless by making cash settlement equal to its current market value THE COURSE OF FINANCE 2017 SPRING SJTU 7
The Farmer and the Baker (Example) Jamela is a farmer with a wheat crop of about 100,000 bushels,1- month from harvest Mohammed is a baker who will need to restock his inventory of wheat for the coming year THE COURSE OF FINANCE 2017 SPRING SJTU 8
The Farmer and the Baker (Example) Jamela is a farmer with a wheat crop of about 100,000 bushels, 1- month from harvest Mohammed is a baker who will need to restock his inventory of wheat for the coming year THE COURSE OF FINANCE 2017 SPRING SJTU 8
The Farmer and the Baker Jamela and Mohammed wish to reduce price uncertainty because: Jamela has a mortgage to pay on her farm,and is concerned about wheat prices falling in the next month Mohammed wishes to close an agreement with a supermarket to supply bread at a fixed price for the coming year THE COURSE OF FINANCE 2017 SPRING SJTU 9
The Farmer and the Baker Jamela and Mohammed wish to reduce price uncertainty because: Jamela has a mortgage to pay on her farm, and is concerned about wheat prices falling in the next month Mohammed wishes to close an agreement with a supermarket to supply bread at a fixed price for the coming year THE COURSE OF FINANCE 2017 SPRING SJTU 9
The Farmer and the Baker Jamela and Mohammed agree to a forward contract Jamela agrees to deliver 100,000 bushels of wheat at $2.00 a bushel in one month,and Mohammed agrees to pay the $200,000 on delivery in a forward contract market. Assuming the crop doesn't fail,both parties have hedged their obligations THE COURSE OF FINANCE 2017 SPRING SJTU 10
The Farmer and the Baker Jamela and Mohammed agree to a forward contract Jamela agrees to deliver 100,000 bushels of wheat at $2.00 a bushel in one month, and Mohammed agrees to pay the $200,000 on delivery in a forward contract market. Assuming the crop doesn't fail, both parties have hedged their obligations THE COURSE OF FINANCE 2017 SPRING SJTU 10