Chapter 2 Mechanics of
and Closing Futures Contracts
The Specification of the Futures
Daily Settlement and Margins
Futures price quotes
Convergence of Futures Price to Spot
Forward contracts vs Futures contracts
Types of Traders
2.1 Opening and Closing out
Cash or Spot Market
: The market for
immediate delivery and payment
Gas station, grocery store, department store,
Delivers Commodity Accept Commodity
The SELLER is said to be SHORT
The BUYER is said to be LONG
The market for deferred delivery and
The two parties make a contract that
determines the delivery and payment
place and time in the future.
SHORT Position =commit to sell
LONG Position = commit to buy
Available on a wide range of assets
contract is usually referred to
by its delivery month.
◦Buy 100 oz. of gold @ US$900/oz. in
December (NYMEX) – long position
◦Sell £62,500 @ 2.0500 US$/£ in March
◦Sell 1,000 bbl. of oil @ US$120/bbl. in
April (NYMEX)– short position
Opening a Future Contract – an
Example of Corn Future Contract traded on
March 5 an investor in New York might call
a broker with instructions to buy 5,000 bushels
of corn for delivery in July of the same year.
The broker would immediately pass these
instructions on to a trader on the floor of the
The broker would request a long position
in one contract (each corn contract on CME is
for the delivery of 5,000 bushels).
about the same time, another investor in
Kansas might instruct a broker to sell 5,000
bushels of corn for July delivery.
This broker would pass instructions to
short one contract to a trader on the floor
The two floor traders would meet, agree on
a price to be paid for the corn in July, and
the deal would be done.
Such price is called the current future
price for July corn, which is determined by
the law of supply and demand.
Closing out position
into the opposite type of
trade from the original one.
vast majority of futures
contracts do not lead to delivery.
Inconvenient and Expensive
New York investor can close out the
position by selling one July corn futures
contract on April 20.
Kansas investor can close out the
position by buying one July corn futures
contract on April 20.
gain or loss of each investor is
determined by the change in the futures
price between March 5 and April 20.
2.2 Specification of
need to be defined:
◦ What can be delivered– the Asset
◦ How much of the asset will be delivered under one
contract -- Contract size
◦ Where it can be delivered– Delivery Arrangements
◦ When it can be delivered– Delivery Months
1000 克 / 手
0.01 元 / 克
单 单 单 单 单单
1 － 12 月
上午 9:00 － 11:30 下午 1:30 － 3:00
单 单 单 单 15 日（遇法定假日单单
金含量不小于 99.95% 的国单单
单 单 单 单 单 单单
（ LBMA ）认定的合格供单单
单 单 单单
单 单 单 单 单 单 单单单
◦ Need to specify the grade of the underlying
◦ For some commodities a range of grades
can be delivered, but the price received
depends on the grade chosen.
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