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Chapter 1
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.2
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.3
Examples of Derivatives
Futures Contracts
Forward Contracts
Swaps
Options
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.4
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.5
Futures Contracts
A futures contract is an agreement to
buy or sell an asset at a certain time in
the future for a certain price
By contrast in a spot contract there is
an agreement to buy or sell the asset
immediately (or within a very short
period of time)
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.6
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1.7
Futures Price
The futures prices for a particular
contract is the price at which you agree
to buy or sell
It is determined by supply and demand
in the same way as a spot price
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.8
Electronic Trading
Traditionally futures contracts have
been traded using the open outcry
system where traders physically meet
on the floor of the exchange
Increasingly this is being replaced by
electronic trading where a computer
matches buyers and sellers
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.9
1.10
Terminology
The party that has agreed
to buy has a long position
The party that has agreed
to sell has a short position
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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Example
January: an investor enters into a
long futures contract on COMEX to
buy 100 oz of gold @ $300 in April
April: the price of gold $315 per oz
What is the investors profit?
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.11
1.12
1.13
Forward Contracts
Forward contract are similar to futures
except that they trade in the over-thecounter market
Forward contracts are popular on
currencies and interest rates
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.14
Bid
1.5118
Offer
1.5122
1-month forward
1.5127
1.5132
3-month forward
1.5144
1.5149
6-month forward
1.5172
1.5178
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.15
Options
A call option is an option to buy a
certain asset by a certain date for a
certain price (the strike price)
A put option is an option to sell a
certain asset by a certain date for a
certain price (the strike price)
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.16
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.17
July
Oct
Call
Call
16.87 18.87
65
7.00 10.87
80
2.00
July
Put
2.69
Oct
Put
4.62
8.25 10.62
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.18
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1.19
Options vs Futures/Forwards
A futures/forward contract gives the
holder the obligation to buy or sell at a
certain price
An option gives the holder the right to
buy or sell at a certain price
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.20
Types of Traders
Hedgers
Speculators
Arbitrageurs
Some of the large trading losses in
derivatives occurred because individuals
who had a mandate to hedge risks switched
to being speculators (See Chapter 21)
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.21
1.22
1.23
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.24
1. Gold: An Arbitrage
Opportunity?
Suppose that:
The spot price of gold is US$390
The quoted 1-year futures price of gold
is US$425
The 1-year US$ interest rate is 5% per
annum
Is there an arbitrage opportunity?
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.25
1.26
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.27
1. Oil: An Arbitrage
Opportunity?
Suppose that:
The spot price of oil is US$19
The quoted 1-year futures price of
oil is US$25
The 1-year US$ interest rate is 5%
per annum
The storage costs of oil are 2% per
annum
Is there an arbitrage opportunity?
Fundamentals of Futures and Options Markets, 4th edition 2001 by John C. Hull
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1.28