Chapter 13 - Financial Futures Markets
POINT/COUNTER-POINT:
Has the Futures Market Created More Uncertainty for Stocks?
POINT: Yes. Futures contracts encourage speculation on indexes. Thus, an entire market can be influenced by the trading of speculators.
COUNTER-POINT: No. Futures contracts are commonly used to hedge portfolios, and therefore can reduce the effects of weak market conditions. Moreover, investing in stocks is just as speculative as taking a position in futures markets.
WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue.
ANSWER: While excessive speculation could affect the underlying stock price or stock index, more informed investors should be able to correct for any mispricing, and therefore push the price toward its fundamental value. In addition, speculators could trade the underlying stocks as well and could have a direct effect on the stock price.
Questions
1. Futures Contracts. Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts? ANSWER: A futures contract is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. The clearinghouse records all transactions and guarantees timely payments on futures contracts. This precludes the need for a purchaser of a futures contract to check the creditworthiness of the contract seller.
5. Gains from Purchasing Futures. Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? What is the maximum loss to a purchaser of a futures contract?
ANSWER: Purchasers of financial futures contracts can offset their positions by selling the identical contracts. Their gain is the difference between what they sold the contracts for and their purchase price. The maximum loss is the amount to be paid at settlement date as specified by the
Has the Futures Market Created More Uncertainty for Stocks?
POINT: Yes. Futures contracts encourage speculation on indexes. Thus, an entire market can be influenced by the trading of speculators.
COUNTER-POINT: No. Futures contracts are commonly used to hedge portfolios, and therefore can reduce the effects of weak market conditions. Moreover, investing in stocks is just as speculative as taking a position in futures markets.
WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion on this issue.
ANSWER: While excessive speculation could affect the underlying stock price or stock index, more informed investors should be able to correct for any mispricing, and therefore push the price toward its fundamental value. In addition, speculators could trade the underlying stocks as well and could have a direct effect on the stock price.
Questions
1. Futures Contracts. Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts? ANSWER: A futures contract is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. The clearinghouse records all transactions and guarantees timely payments on futures contracts. This precludes the need for a purchaser of a futures contract to check the creditworthiness of the contract seller.
5. Gains from Purchasing Futures. Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? What is the maximum loss to a purchaser of a futures contract?
ANSWER: Purchasers of financial futures contracts can offset their positions by selling the identical contracts. Their gain is the difference between what they sold the contracts for and their purchase price. The maximum loss is the amount to be paid at settlement date as specified by the