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SYNOPSIS
BADMAASH COMPANY CONCEPTS : 1. BUYING AND SELLING OF SHARES IN SHARE MARKET 2. FUTURES MARKET (DERIVATIVES)
Objective 1:
Futures Contract
Futures contract: standardized agreement between two parties committing one to buy and the other to sell at a set price on or before a given date in the future . Initial Margin: Minimum amount required to initiate a trade Maintenance margin: Minimum amount required at all times to sustain a market position Margin call: when margin level is lower than maintenance margin
o Offsetting.
o Means to do the opposite of what you had previously done. o Example: if you had previously bought a contract, you sell it back. If you had sold one, then you buy it back.
Objective 1:
1. Provide an efficient and effective mechanism for the management of price risk. 2. Provide a source of information for decision making. 3. Provide a means for firms to secure additional operating capital.
Objective # 2
Describe the different futures market participants
Objective 2:
Objective 2:
1. We can classify the people who are the futures market participants into several different categories. The general public that trades would be in the last two categories: either public speculators or hedgers.
1. Brokers: fill orders for outside speculators and hedgers. 2. Professional Speculators: trade for own accounts. 3. Scalpers buys and sells minute by minute.
Objective 3:
4. Traders take large positions and hold for several days. 5. Hedgers: Producers or users of commodities who seek protection against adverse price changes by taking a futures position opposite to cash position. 6. Public speculators: Place orders with brokers to profit from anticipated price changes. Not necessarily interested in owning the commodity, but only in profiting off movements in the price.
Objective 3
Understand the clearinghouse and margins
Clearing House o Assumes the opposite side of every trade so that all connections between buyers and sellers are served. o Because the number of buys = number of sells, the clearing house has no net position.
Objective 3:
Margins
1. To trade you must have an account. 2. With every new trade, traders must deposit money called margin. 3. Margins serves as a deposit. 4. Initial margin: initial deposit paid. 5. Maintenance Margin: minimum amount of money that must be kept in accounts. 6. Margins are NOT a COST for trading futures. Your margin money is a deposit in your account and if your trade is not a losing trade, you will still have your margin money. 7. The clearing house marks-to-market all open positions at the end of a day to adjust all accounts.
Objective 4:
Short and Long positions.
Simple Rule:
Normal Market
1. Normal Market is nearby price is lower than the distant contract price so prices increase into the future. It reflects the cost of storage. For example, if the nearby month is Dec and the Dec price is 2.32 and the March price 2.39 and the May price is 2.44 and the July Price is 2.48 and the Sept price is 2.57 then the market is normal. 2. Is common when supplies are large. 3. Tells the trader what the market will pay for storage. 4. Futures price spreads rarely reflect full carrying charge.
Inverted Market
1. Inverted Market =
1. 2. nearby prices are higher than distant contract prices So prices decrease into the future. It reflects a negative price of storage. In other words, we are in short demand of the product so the market price is telling you that they will pay a premiums if the product is delivered now do not store the product until later. For example, if Dec is the nearby month again, but this time the Dec price is 2.32, the March price is 2.28, the May price is 2.20, the July price is 2.16, and the Sept price is 2.10, now the market is inverted.
3.
Any Questions
Quiz
1. What is a futures contract? 2. What are the two ways a futures contract can be settled? 3. Who are the participants in the futures market? 4. What is a Maintenance Margin? 5. What is a Short Position? 6. What is a Long Position?