FMPMC 411

COURSE LEARNING OUTCOMES

At the end of the module, you should be able
to:
discuss the role of technology for teaching and
learning languages in the light of the K to 12
Curriculum Framework;
review the K to 12 Curriculum Guide focusing
on the development of 21st century skills in
language education;
review learning plans in language teaching
from various sources that integrated ICTs in
the teaching learning process;
plan activities integrating ICTs that will
facilitate the development of the 21st century
skills required in the curriculum guide; and
brainstorm about digital citizenship and relate
this to the development of 21st century skills
among learners.

Special Topics in Financial Management

 MODULE 3
FUTURES MARKET AND CONTRACT

Engage:

Are you a time traveler? Cause I see you in my

future!

FUTURES MARKET

Futures Market are places (exchanges) to buy and sell futures contract.

Examples:

New York Mercantile Exchange

Chicago Board of Trade
Chicago Mercantile Exchange
Chicago Climate Futures Exchange
Kansas City Board of Trade
Chicago Board of Options Exchange

FUTURES CONTRACT

 A futures contract is an agreement to buy (if you are in long position) or sell (if you are
short) something in the future, at an agreed upon price (the futures price).
 Futures exist on financial assets (debt instruments, currencies, stock indexes), and real
assets (gold, crude oil, wheat, cattle, cotton, etc.)

A Comparison of Futures Contracts and Forward Contracts

1. Both types of contracts specify a trade between two counter-parties:

 There is a commitment to take delivery of an asset (this is the buyer, or the long)
 There is a commitment to deliver an asset (this is the seller, or the short)

2. Many times, futures contracts and forward contracts are substitutes.

Futures and Forwards: A Comparison Table

Other Unique Features of Futures Contracts

1. Some futures contracts have daily price limits.

2. Some futures contracts (Euro$, T-bills, stock index futures, currencies) have one specific
delivery date; others (T-bonds, crude oil) give the short the option of choosing which day
(usually in the delivery month) to make delivery.
3. Some futures contracts (e.g., T-bonds) let the seller choose the quality of good to deliver,
within a specified quality range.
4. Some futures contracts are cash settled.

Explore:

Key Concept:
Seller of the contract
Buyer of the contract
Underlying instrument
Expiration Date
Size
Delivery cycle
The spot price of the underlying asset
Settlement mechanism
Basic Types of Futures
Contract

1. Interest Rate Futures Contracts

 Contracts with interest-bearing instrument as the underlying asset.
  Available on money market instruments and bond instruments

2. Stock Index Futures Contracts

 Agreement to buy or sell standardized value of stock index, on a future date at a
specified price.
 It is purely cash settlement market.

Potential uses of Stock Index Future

a. Speculation
 Speculators may attempt to profit from the major movements in the market.
(fundamental or technical analysis)
 Speculators are often blamed for big price swings in the futures market. (law of
supply and demand)

b. Hedging
 Used to minimize or manage market risks of an existing large diversified
portfolio. (portfolio insurance)
 Does not seek profit by trading securities futures but rather seek to stabilize the
revenues or costs of their business operations.

c. Arbitraging
 Simultaneous buy/sell program trading where there is a profitable difference
between index futures and stocks presented in the underlying index.

3. Commodity Futures
 Agreement that provide for the delivery of a specific amount of a commodity at a
designated time in the future at a given price.
 Almost all commodities future contract are closed out ore reserved before the actual
delivery date occurs.

Currency Futures Contract/Foreign Exchange futures

 Futures are available in the currencies such as:

Euro
Australian Dollar
Canadian Dollar
Japanese Yen
Mexican Peso
Russian Ruble

 Two primary purposes as financial instrument

1. They can be used by companies or sole proprietors to remove the exchange rate risk
inherent in the cross-border transactions.
2. They can be used by investors to speculate and profit from currency exchange rate
fluctuations.

Futures Contracts: Payoff Profiles

The Clearinghouse

1. An intermediary that guarantees that traders in the future will honor their obligation.
2. It acts as the buyer to every seller and seller to every buyer.
3. Owned by futures exchanges/markets

The Margin

1. Margin in securities market (bond or stock market)

 The percentage of the market value of the asset
  The use of borrowed money to purchase securities

2. Margin in futures markets

 It refers to the initial deposit of "good faith" made into an account in order to enter
into a futures contract.
 There is no loan involved and consequently, no interest charges.

The Futures Margin

futures margin is the minimum amount of funds required in your trading account to initiate a
buy or sell futures position.

 Types of Margin

1. Initial margin – This is the minimum amount set by a futures exchange platform to
enter a futures position.

2. Maintenance margin – This refers to the amount that you must maintain at any given
time in your trading account to cover potential losses on your positions.

3. Day trade margins – This is basically an initial margin for a full day’s trade. This
means it is the minimum amount required to day trade a contract.

4. Position trade or overnight margins – This is the margin required to hold your
position past the closing time of the market and into the next trading day.

 Settlement price
 Average of the prices of the trades during the last period of trading (closing period)
 Set by the exchange to prevent manipulation of prices by the traders.
 Used to make calculations at the end of each trading day.

Elaborate:

How a Futures Trade Takes Place

Observe the following from the video:
Marking to market
The history
The margins
Futures as leveraged investment

COMPUTATION OF MARGIN BALANCE

 Initial Margin Example:

Example 1:
 Assuming you go long on the futures contracts for XYZ stock trading at $10 covering
100 shares and required 20% initial deposit. How much is the initial margin required?

Answer:

Total value covered under futures contract = $10 x 100 = $1000 

Initial margin required = $1000 x 20% = $200

Example 2: 
Following up from the first example. Assuming at the end of the first trading day, XYZ
stock rises to $10.10. What would be the Margin Balance?

Answer:

Total Profit = ($10.10 - $10) x 1000 = $0.10 x 1000 = $100 

Margin balance = $200 + $100 = $300

Example 2: 
Following up from the above example. Assuming at the end of the second trading day,
XYZ stock drops to $9.90. How much would be the margin balance?

Answer:

Total loss = ($10.10 – $9.90) x 1000 = $0.20 x 1000 = $200 

Margin Balance = $300 - $200 = $100 (what would this mean?)

 Maintenance Margin Calculation Example: 

Maintenance margin in actual dollars and cents = (Contract Size X Maintenance

Margin) X Number of Contracts 

Actual Price of underlying asset when maintenance margin will be hit = Stock Price -
(Initial Margin - Maintenance Margin)

Example:

Given: 100 shares of stock

Stock Price: $217.89
Initial margin per contract: $54.47
Maintenance margin per contract = $43.58

Assuming you went long 3 contracts. 

You would have paid (100 x $54.47) x 3 = $16,341 in initial margin. 

 Maintenance margin level = (100 x $43.58) x 3 = $13,074. 

Price of the stock when maintenance margin will be hit = $217.89 – (54.47 –
43.58) = 217.89 – 10.89 = $207 

This means that when your $16,341 paid as initial margin drops down to below
$13,074, you would receive a margin call to top up variation margin. This happens
when AAPL stock drops to $207.

 Computing the Margin Balance

Example: Consider a long position of five July wheat contracts, each of which covers 5,
000 bushels. Assume that the contract price is $2.00 and that each contract requires an
initial margin deposit of $150 and a maintenance margin of $100. The total initial margin
required for the 5-contract trade is $750. The maintenance margin for the account is
$500. Compute the margin balance for this position after a 2-cent decrease in price on
Day 1, a 1-cent increase in price on Day 2, and 1-cent decrease in price on Day 3.

Answer:

Each contract is for 5,000 bushels so that a price change of $0.01 per bushel
changes the contract value by $50, or $250 for the five contracts: (0.01)(5)(5,000)
= $250.00.

How Futures Contract can be Terminated at or Prior to Expiration?

1. Through Delivery
The location for delivery, terms of delivery, and details of what is exactly to be delivered
are all specified in the contract.

2. Cash Settlement
The futures account is marked-to-market based on the settlement price on the last day of
trading

3. Reverse or Offsetting
If you make an exact opposite trade (maturity, quantity, and good) to your current
position, the clearinghouse will net your positions out, leaving you with zero balance.

4. Exchange for Physicals

Transaction is off the floor of the exchange (ex-pit transaction).
The sole exception to the federal law

Characteristics of the types of futures contracts

1. Treasury Bills
 Based on a $1million face value 90-day
 Settled in cash
 Price quotes are 100% minus the annualized discount in percent on the T-bills

Example:
 A price quote of 98.52 represents an annualized discount of 1.48%. What is the actual
discount from the face? How much is the delivery price?

Answer:
Actual discount = 0.0148 x (90/360) = 0.0037
Delivery price = (1 – 0.0037) x 1 million = $996, 300

Disadvantage of T-bills: Their prices are heavily influenced by US Federal Reserve

operations and the overall monetary policy.

2. Eurodollar Futures
 Based on a 90-day LIBOR
 Price quotes are 100%-annualized LIBOR in percent
 Cash settled
 Minimum price change is one “tick” (.01% of the face value of the contract which is
equivalent to $25)

Example:
A quote of 97.60% corresponds to an annualized LIBOR of (100% – 97.60) = 2.4% and
an effective 90-day yield of 2.4%/4 = 0.6%

If you took a long position at 98.52 and the price fell to 98.50, how much is the long’s
loss?

Answer:

3. Treasury Bond Futures Contracts

 Traded for treasury bonds with maturities greater than 15 years
 Deliverable contract
 Has a face value of $100,000
 Quoted as a percent and fractions of 1% of the face value.
 Each bond is given a conversion factor
 (conversion factor is a multiplier for a futures price at settlement and is used to
adjust the long’s payment at delivery)

4. Stock Index Futures

 Multiplier vary from contract to contract
 Pricing and contract valuation are the same
 The most popular stock index future is the S&P 500 Index future
 Cash settled based on a multiplier of 250
 Each index point in the futures price represents a gain or loss of $250 per contract

Example:
An index level of 1,000, what is the value of each contract?
If a long stock index futures position on S& P 500 index futures at 1, 051 and has an
index of 1, 058 at the settlement date, how much would be the trader’s gain?

Answer:
5. Currency Futures
 Smaller in volume than the forward currency market
 Contract are set in units of the foreign currency
 Price is stated in USD/unit

Example:
The size of the peso contract is MXP500, 000, and the euro contract is on EUR125, 000.
How much would be the gain of loss on MXP500, 000 unit contract and on EUR125, 000
unit contract if the change in the price of the currency unit is USD0.0001?

Answer:

Elaborate:

In a short bond paper differentiate Forward contract and future contract through an illustrative example.

Evaluate:
(A quiz will be administered to assess your learning and it will be sent in a separate mail or
posted at google classroom based on the activity schedule.)