FIN 501 Lecture Notes - Lecture 16: None Of The Above, Risk-Free Interest Rate, Arbitrage
20 Nov 2014
School
Department
Course
Professor
Document Summary
Futures o o o o o o o. Agreement made today between buyer + seller who are obligated to complete transaction at set date in future. No mark-to-mark, margin, cash changes hands until trade is made. Default risk other party might have incentive to default on k. Always end in delivery b/c banks are involved. Transactions are cheaper b/c not going through banks. Trades futures to transfer price risk by adding futures position that is opposite of existing position in commodity or financial instrument. Speculators absorb price risk by betting on future direction of prices. Short hedge sale of future to offset potential losses from price . Long hedge buying futures to offset potential losses from price . Full hedge futures position that is equal, but opposite, the position in underlying asset. Futures exchange allows only exchange members to trade on exchange. Future position can be closed out at any time through reverse trade.
