Tài chính doanh nghiệp - Chapter 13: Financial futures markets

Chapter 13Financial Futures MarketsFinancial Markets and Institutions, 7e, Jeff MaduraCopyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.1Chapter OutlineBackground on financial futuresInterpreting financial futures tablesValuation of financial futuresExplaining price movements of bond futures contractsSpeculating with interest rate futuresClosing out the futures position2Chapter Outline (cont’d)Hedging with interest rate futuresBond index futuresStock index futuresSingle stock futuresRisk of trading futures contractsRegulation in the futures marketsInstitutional use of futures marketsGlobalization of futures markets3Background on Financial FuturesA financial futures contract is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and dateThe buyer of a futures buys the instrument while the seller delivers the instrumentFutures are traded on organized exchangesThe exchanges clear, settle, and guarantee all transactions that occur on the exchangeFutures are regulated by the Commodity Futures Trading Commissions (CFTC)Approves futures contracts and imposes regulations4Background on Financial Futures (cont’d)Interest rate futures are on debt securities such as T-bills, T-notes, T-bonds, and Eurodollar CDsStock index futures are on stock indexesSettlement dates are in March, June, September, and DecemberMost financial futures are traded on the Chicago Board of Trade or the Chicago Mercantile Exchange5Background on Financial Futures (cont’d)Purpose of trading financial futuresTraded either to speculate on prices of securities or to hedge existing exposure to security price movementsSpeculators take positions to profit from expected changes in the price of futures contracts over timeDay traders attempt to capitalize on price movements during a single dayPosition traders maintain their futures positions for longer periods of timeHedgers take positions to reduce their exposure to future movements in interest rates or stock prices6Background on Financial Futures (cont’d)Electronic tradingThe Chicago Mercantile Exchange established GLOBEX that compliments its floor tradingAllows for around the clock and weekend tradingThe Chicago Board Options Exchange implemented a fully electronic futures exchange in 20047Background on Financial Futures (cont’d)Steps involved in trading futuresMembers of a futures exchange are either:Commission brokers, who execute orders for their customers and are often employed by brokerage firmsFloor traders (locals), who trade futures contracts for their own accountMany types of futures contracts now trade over the counterAre more personalized and can be tailored to the specific preferences of the parties involved8Background on Financial Futures (cont’d)Steps involved in trading futures (cont’d)Customers must establish margin deposits with their brokersInitial margin is typically between 5 and 18 percent of a futures’ full valueA futures contract price is “marked to market” dailyCustomers may receive a margin call if the value moves in an unfavorable directionA market order is executed at the prevailing price of the futures contractA limit order is executed only if the price is within the limit specified9Background on Financial Futures (cont’d)Steps involved in trading futures (cont’d)How orders are executedBrokerage firms communicate customers’ order to telephone stations located near the trading floorFloor brokers accommodate ordersWhen two traders on the floor reach an agreement through open outcry, the information is transmitted to the customersFloor brokers receive transaction fees in the form of a bid-ask spreadThe futures exchange acts as a clearinghouse10Interpreting Financial Futures TablesThe Wall Street Journal provides a comprehensive summary of trading activity on various financial futures contractsExample of Treasury bill futures quotations:      Discount  OpenHighLowSettleChangeSettleChangeOpenSept 200593.8094.0593.8094.05+.285.95–.282,51911 Characteristic of Futures ContractTreasury Bond Futures Treasury Note Futures Size$100,000 face value$100,000 face valueDeliverable gradeTreasury bonds maturing at least 15 years from date of delivery is not callable; coupon rate is 8%Treasury notes maturing at least 6.5 years but not more than 10 years from the first day of the delivery month; coupon rate is 6%Price quotationIn points ($1,000) and thirty-seconds of a pointIn points ($1,000) and thirty-seconds of a pointMinimum price fluctuationOne thirty-second (1/32) of a point, or $31.25 per contractOne thirty-second (1/32) of a point, or $31.25 per contractDaily trading limitsThree points ($3,000) per contract above or below the previous day’s settlement priceThree points ($3,000) per contract above or below the previous day’s settlement priceSettlement monthsMarch, June, September, DecemberMarch, June, September, December12Valuation of Financial FuturesThe price of a financial futures contract generally reflects the expected price of the underlying security as of the settlement dateAs the market price of the financial asset changes, so will the value of the contractFactors that influence the expected price of the asset influence the futures’ price:The current price of the assetEconomic or market conditionsImpact of the opportunity costInvestors who buy stock index futures instead of the stock index do not receive any dividendsInvestors who buy stock index futures put up a much smaller investment13Explaining Price Movements of Bond Futures ContractsParticipants in the Treasury bond futures market closely monitor the same economic indicators monitored by participants in the Treasury bond market:EmploymentGDPRetail salesIndustrial productionConsumer confidenceInflation indicatorsIndicators that reflect the amount of long-term financing14Speculating with Interest Rate FuturesInvolves trading T-bill futuresThe position taken depends on interest rate expectationsIf interest rates are expected to decline, purchase T-bill futuresIf interest rates are expected to increase, sell T-bill futuresThe maximum possible loss when purchasing futures is the amount to be paid for the securities15Speculating with Interest Rate Futures (cont’d)00Payoff from Purchasing FuturesPayoff from Selling FuturesMV of Futuresat SettlementMV of Futuresat Settlement16Speculating on Increasing Interest RatesAn investor anticipates that interest rates are going to decrease. Consequently, she purchases a T-bill futures contract for 94.20 in February. On the March settlement date, the T-bill futures contract has a price of 94.70. What is the investor’s nominal profit from this strategy?17Speculating on Decreasing Interest RatesAn investor anticipates that interest rates are going to increase. Consequently, she sells a T-bill futures contract for 94.20 in February. On the March settlement date, the T-bill futures contract has a price of 93.50. What is the investor’s nominal profit from this strategy?18Speculating with Interest Rate Futures (cont’d)Impact of leverageThe return is magnified substantially when considering the relatively small margin maintained by many investors19Closing Out the Futures PositionRather than making or accepting delivery, most buyers and sellers take offsetting positions to close out the futures contracte.g., speculators who purchased T-bond futures contracts would sell similar futures contracts by the settlement date If the futures price has risen over the holding period, speculators who purchased interest rate futures will realize a positive gainOnly about 2 percent of all futures contracts actually involve delivery20Closing Out the Futures PositionA speculator purchased a futures contract on T-bonds at a price of 90–12. Two months later, the speculator sells the same futures contract in order to close out the position. At that time, the futures contract specifies 93–14 of the par value as the price. What is the nominal profit from this futures transaction?21Hedging with Interest Rate FuturesThe difference between a financial institution’s volume of rate-sensitive assets and rate-sensitive liabilities represents its exposure to interest rate riskIn the long run, the institution could restructure its assets or liabilitiesIn the short run, the institution could use financial futures to hedge its exposure to interest rate movements22Hedging with Interest Rate Futures (cont’d)Using interest rate futures to create a short hedgeIf an institution has more rate-sensitive liabilities than assets, it will be adversely affected by rising interest ratesThe institution could sell futures on securities with similar characteristics than its assetsIf interest rates rise, the loss on the rate-sensitive assets will be offset by the gain on the short futures position23Hedging with Interest Rate Futures (cont’d)Using interest rate futures to create a short hedge (cont’d)Tradeoff from using a short hedgeInterest rate futures can hedge against both adverse and favorable eventsThe probability distribution of returns is narrower with hedging than without hedgingInstitutions that frequently use interest rate futures may be able to reduce the variability of their earnings over time24Hedging with Interest Rate Futures (cont’d)Using interest rate futures to create a short hedge (cont’d)Cross-hedging is the use of a futures contract on one financial instrument to hedge a position in a different financial instrumentThe effectiveness depends on the degree of correlation between the market values of the two financial instrumentse.g., a short position in Treasury bond futures to hedge interest rate risk of a portfolio of corporate bondsEven with a high correlation, the value of the futures contract may change by a higher or lower percentage than the portfolio’s market value25Hedging with Interest Rate Futures (cont’d)Using interest rate futures to create a long hedgeIf an institution has more rate-sensitive assets than liabilities, it will be adversely affected by declining interest ratesThe institution could purchase T-bill futures to lock in the price at a specified future dateIf interest rates decline, any reduction in the bank’s earnings will be offset by the gain on the short futures position26Hedging with Interest Rate Futures (cont’d)Hedging net exposureNet exposure reflects the difference between asset and liability positionse.g., a bank has both long-term fixed-rate liabilities and long-term assetsIf interest rates rise, the value of assets will decline, but the bank benefits from the fixed rate of long-term liabilities27Bond Index FuturesA bond index futures contract allows for the buying an selling of a bond index for a specified price at a specified dateThe CBOT offers Municipal Bond Index (MBI) futuresBased on the Bond Buyer Index of 40 actively traded general obligation and revenue bonds28Stock Index FuturesA stock index futures contract allows for the buying and selling of a stock index for a specified price at a specified dateAvailable for various stock indexes (see next slide)Have four settlement dates on the third Friday in March, June, September, and DecemberThe securities underlying the stock index futures are not deliverable; settlement occurs through a cash paymentThe net gain or loss is the difference between the futures price when the initial position was created and the value of the contract on the settlement dateSome speculators prefer to trade stock index futures rather than actual stocks because of the smaller transaction costs29Stock Index Futures (cont’d)Type of Stock Index Futures ContractContract Is Valued As: S&P 500 index$250 times indexMini S&P 500 index$50 times indexS&P Midcap 400 index$500 times indexS&P Small Cap index$200 times indexNasdaq 100 index$100 times indexMini Nasdaq 100 index$20 times indexMini Nasdaq Composite index$20 times indexNikkei 225 index$5 times indexRussell 2000 index$500 times index30Stock Index Futures (cont’d)Valuing stock index futures contractsThe value of a stock index futures contract is highly correlated with the value of the underlying stock indexThe value of a stock index futures contract commonly varies from the value of the underlying indexThe price of index futures contracts is driven by the underlying asset and the cost of carry (the net financing cost to buy the index)In general, the underlying security changes by a much greater degree than the cost of carry, so changes in financial futures prices are primarily attributed to changes in the values of the underlying securities31Stock Index Futures (cont’d)Valuing stock index futures contracts (cont’d)Indicators monitored by participants in stock index futuresParticipants in the futures market monitor indicators that may signal changes in the stock indexesSpeculating with stock index futuresStock index futures can be traded to capitalize on expectations about stock market movementsIf the market is expected to increase, buy stock index futuresIf the market is expected to decrease, sell stock index futures32Speculating with Stock Index FuturesJimmy Dean expects the S&P 500 index to increase in the near future. Thus, Jimmy decides to purchase an S&P 500 futures contract with a December settlement date. The current futures price is 1,200. If the futures price rises to 1,250 by the settlement date, what is Jimmy’s nominal profit?33Stock Index Futures (cont’d)Hedging with stock index futuresFutures can be used to hedge the market risk of an existing stock portfolioSell stock index futures if the existing portfolio is expected to declineBuy stock index futures if the existing portfolio is expected to increaseThe hedge is more effective when the portfolio is diversified34Stock Index Futures (cont’d)Hedging with stock index futures (cont’d)Test of suitability of stock index futuresUsefulness can be assessed by measuring the sensitivity of the portfolio’s performance to market movementsDetermine whether a hypothetical derivative position would have offset adverse market effects on the portfolio’s performanceDetermining the proportion of the portfolio to hedgePortfolio managers may be partially exposed in the event the stock price risesThe higher the proportion of the portfolio that is hedged, the more insulated the manager’s performance is from market conditions35Stock Index Futures (cont’d)Dynamic asset allocation with stock index futuresIn dynamic asset allocation, investors switch between risky and low-risk investment position in response to changing expectationse.g., buy stock index futures if favorable market conditions are expectedPrices of stock index futures versus stocksPrices of index futures and the index can differ to some degreeRecent studies have found a high degree of correlation between the stock index futures and the index itself36Stock Index Futures (cont’d)Arbitrage with stock index futuresProgram trading in conjunction with the trading of stock index futures is known as index arbitrageSecurities firms act as arbitrageurs and attempt to capitalize on discrepancies between prices of index futures and stocksIndex arbitrage involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprisesInstigated when futures prices differ significantly from the stock represented by the index37Stock Index Futures (cont’d)Circuit breakers on stock index futuresCircuit breakers are trading restrictions imposed on specific stocks or stock indexesThe CME imposes circuit bakers on the S&P 500 futures contractCircuit breakers allow investors to determine whether circulating rumors are true and to work out credit arrangements if they have received a margin call38Single Stock FuturesA single stock futures contract is an agreement to buy or sell a specified number of shares of a specified stock on a specified future dateNominal size of a contract is 100 sharesInvestors can buy or sell futures through their brokerSettlement dates are on the third Friday of March, June, September, and December for the next 5 quarters, as well as the nearest two monthsInvestors can buy single stock futures on marginSingle stock futures are regulated by the Commodity Futures Trading Commission (CFTC) and the SECInvestors can close out their position at any time by taking the opposite positionOneChicago is a joint venture between the CBOE and the CBOT which serves as another market for trading single stock futures39Risk of Trading Futures ContractsMarket risk refers to fluctuations in the value of the instrument as a result of market conditionsBasis risk is the risk that the position being hedged is not affected in the same manner as the instrument underlying the futures contractLiquidity risk refers to potential price distortions due to a lack of liquidityCredit risk is the risk that a loss will occur because a counterparty defaults on the contractPrepayment risk refers to the possibility that the assets to be hedged may be prepaid earlier than their designated maturityOperational risk is the risk of losses as a result of inadequate management or controls40Regulation in the Futures MarketsSystemic risk is the risk that a particular even could spread adverse effects among several firms or among financial marketsRegulators have attempted to reduce systemic risk by:Ensuring that participants in derivative markets have adequate collateral to back their positionsEnsuring that participants fully disclose their exposure to risk resulting from derivative positionsThe Fed monitors commercial banks’ capitalAccounting regulators revised accounting standards in 1994 to require more disclosure about derivative positions41Institutional Use of Futures MarketsType of Financial InstitutionParticipation in Futures Markets Commercial banksTake positions in futures contracts to hedge against interest rate riskSavings institutionsTake positions in futures contracts to hedge against interest rate riskSecurities firmsExecute futures transactions for individuals and firmsTake positions in futures contracts to hedge their own portfolios against stock market or interest rate movementsMutual fundsTake positions in futures contracts to speculate on future stock market or interest rate movementsTake position in futures contracts to hedge their portfolios against stock market or interest rate movementsPension fundsTake positions in futures contracts to hedge their portfolios against stock market or interest rate movementsInsurance companiesTake positions in futures contracts to hedge their portfolios against stock market or interest rate movements42Globalization of Futures MarketsNon-U.S. participation in U.S. futures contractsU.S. futures are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securitiesThe CBOT has expanded trading hours to cover various time zonesForeign stock index futuresForeign stock index futures have been created to speculate on or hedge against potential movements in foreign stock marketsFutures exchange have been established in Ireland, France, Spain, and ItalyFinancial futures on debt instruments are offered by the London International Financial Futures Exchange (LIFFE), the Singapore International Monetary Exchange (SEMEX), and Sydney Futures Exchange (SFE)43Globalization of Futures Markets (cont’d)Currency futures contractsA currency futures contract is a standardized agreement to deliver or receive a specified amount of a specified foreign currency at a specified price (exchange rate) and dateSettlement months are March, June, September, and DecemberCurrency futures are used by companies to hedge foreign payables or receivables44