Arbitrage theory in continuous time, Cambridge university press, Initial margin is set by the exchange.
FIA's membership  includes more than corporate members. Regular members are futures commission merchants. Associate members include U. Primary members  are only clearing members holding customer funds. Associate members  are U. A full list of primary and associate members can be found here. MarketVoice is published bimonthly, except July and August, by FIA for brokerage firm management, futures professionals, active corporate, institutional and individual traders , members of Congress and their staffs, regulatory officials, and domestic and international press.
FIA collects and compiles daily trading volume and open interest data on all domestic and international futures , options on futures and stock indexes , interest rate and currency contracts traded on U. Reports on volume and open interest are made available to FIA members and other industry participants.
In addition to monthly statistics, the volume report includes comparisons with previous year and year-to-date figures. The information is compiled both by exchange and by commodity group, highlighting significant changes. Each January, FIA creates a year-end report which provides information by commodity group for five years and graphically provides more than 20 years of data. FIA also offers educational books and courses, ethics and anti-money training, and historical and static industry data through its affiliated nonprofit foundation, the Institute for Financial Markets or IFM.
FIA hosts a number of annual and single-session events and conferences in cities around the world. Expo also offers a variety of sessions that allow participants to discuss industry trends, hear experts' views on key issues, improve trading skills and learn about new products, systems and practices. The programs include sessions for business, operations and technology professionals, and traders. More than 5, people from around the world attend Expo in a typical year ranging from senior staff at brokerage firms and exchanges to professional traders, floor traders, CTAs and CPOs, and individual investors.
The first Expo, in a trial run, was held on the CME trading floor in the s. In , FIA hosted 27 regional and division events, drawing in 9, industry professionals from 60 countries and exhibitors. Futures Commission Merchant Regulation. Here, the forward price represents the expected future value of the underlying discounted at the risk free rate —as any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged away.
We define the forward price to be the strike K such that the contract has 0 value at the present time. Assuming interest rates are constant the forward price of the futures is equal to the forward price of the forward contract with the same strike and maturity. It is also the same if the underlying asset is uncorrelated with interest rates. Otherwise the difference between the forward price on the futures futures price and forward price on the asset, is proportional to the covariance between the underlying asset price and interest rates.
For example, a futures on a zero coupon bond will have a futures price lower than the forward price. This is called the futures "convexity correction. This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. In a perfect market the relationship between futures and spot prices depends only on the above variables; in practice there are various market imperfections transaction costs, differential borrowing and lending rates, restrictions on short selling that prevent complete arbitrage.
Thus, the futures price in fact varies within arbitrage boundaries around the theoretical price. When the deliverable commodity is not in plentiful supply or when it does not yet exist rational pricing cannot be applied, as the arbitrage mechanism is not applicable. Here the price of the futures is determined by today's supply and demand for the underlying asset in the future. In a deep and liquid market, supply and demand would be expected to balance out at a price which represents an unbiased expectation of the future price of the actual asset and so be given by the simple relationship.
By contrast, in a shallow and illiquid market, or in a market in which large quantities of the deliverable asset have been deliberately withheld from market participants an illegal action known as cornering the market , the market clearing price for the futures may still represent the balance between supply and demand but the relationship between this price and the expected future price of the asset can break down.
The expectation based relationship will also hold in a no-arbitrage setting when we take expectations with respect to the risk-neutral probability.
With this pricing rule, a speculator is expected to break even when the futures market fairly prices the deliverable commodity. The situation where the price of a commodity for future delivery is higher than the spot price , or where a far future delivery price is higher than a nearer future delivery, is known as contango. The reverse, where the price of a commodity for future delivery is lower than the spot price, or where a far future delivery price is lower than a nearer future delivery, is known as backwardation.
There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities such as single-stock futures , currencies or intangibles such as interest rates and indexes. For information on futures markets in specific underlying commodity markets , follow the links. For a list of tradable commodities futures contracts, see List of traded commodities.
See also the futures exchange article. Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery also called spot or cash market or for forward delivery.
These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates. Contracts on financial instruments were introduced in the s by the Chicago Mercantile Exchange CME and these instruments became hugely successful and quickly overtook commodities futures in terms of trading volume and global accessibility to the markets.
This innovation led to the introduction of many new futures exchanges worldwide, such as the London International Financial Futures Exchange in now Euronext. Today, there are more than 90 futures and futures options exchanges worldwide trading to include:. Most futures contracts codes are five characters. The first two characters identify the contract type, the third character identifies the month and the last two characters identify the year.
Futures traders are traditionally placed in one of two groups: In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract.
Hedgers typically include producers and consumers of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate. For example, in traditional commodity markets , farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan.
Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. In modern financial markets, "producers" of interest rate swaps or equity derivative products will use financial futures or equity index futures to reduce or remove the risk on the swap. Those that buy or sell commodity futures need to be careful. If a company buys contracts hedging against price increases, but in fact the market price of the commodity is substantially lower at time of delivery, they could find themselves disastrously non-competitive for example see: Speculators typically fall into three categories: With many investors pouring into the futures markets in recent years controversy has risen about whether speculators are responsible for increased volatility in commodities like oil, and experts are divided on the matter.
This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual stocks just yet. When it is economically feasible an efficient amount of shares of every individual position within the fund or account can be purchased , the portfolio manager can close the contract and make purchases of each individual stock.
The social utility of futures markets is considered to be mainly in the transfer of risk , and increased liquidity between traders with different risk and time preferences , from a hedger to a speculator, for example. In many cases, options are traded on futures, sometimes called simply "futures options".
A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the specified futures price at which the future is traded if the option is exercised.
Futures are often used since they are delta one instruments. Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula , namely the Black—Scholes model for futures. For options on futures, where the premium is not due until unwound, the positions are commonly referred to as a fution , as they act like options, however, they settle like futures. Investors can either take on the role of option seller or "writer" or the option buyer.
Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the options buyer exercises their right to the futures position specified in the option. The price of an option is determined by supply and demand principles and consists of the option premium, or the price paid to the option seller for offering the option and taking on risk. The Commission has the right to hand out fines and other punishments for an individual or company who breaks any rules.
Although by law the commission regulates all transactions, each exchange can have its own rule, and under contract can fine companies for different things or extend the fine that the CFTC hands out.
The CFTC publishes weekly reports containing details of the open interest of market participants for each market-segment that has more than 20 participants. These reports are released every Friday including data from the previous Tuesday and contain data on open interest split by reportable and non-reportable open interest as well as commercial and non-commercial open interest. Following Björk  we give a definition of a futures contract. We describe a futures contract with delivery of item J at the time T:.
A closely related contract is a forward contract. A forward is like a futures in that it specifies the exchange of goods for a specified price at a specified future date. However, a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. Nor is the contract standardized, as on the exchange. Unlike an option , both parties of a futures contract must fulfill the contract on the delivery date.
The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position can close out its contract obligations by taking the opposite position on another futures contract on the same asset and settlement date.
The difference in futures prices is then a profit or loss. While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects:. Forwards have credit risk, but futures do not because a clearing house guarantees against default risk by taking both sides of the trade and marking to market their positions every night.
Forwards are basically unregulated, while futures contracts are regulated at the federal government level. Futures are always traded on an exchange , whereas forwards always trade over-the-counter , or can simply be a signed contract between two parties.
Futures are margined daily to the daily spot price of a forward with the same agreed-upon delivery price and underlying asset based on mark to market. Forwards do not have a standard. They may transact only on the settlement date. More typical would be for the parties to agree to true up, for example, every quarter. The fact that forwards are not margined daily means that, due to movements in the price of the underlying asset, a large differential can build up between the forward's delivery price and the settlement price, and in any event, an unrealized gain loss can build up.
Again, this differs from futures which get 'trued-up' typically daily by a comparison of the market value of the future to the collateral securing the contract to keep it in line with the brokerage margin requirements. This true-ing up occurs by the "loss" party providing additional collateral; so if the buyer of the contract incurs a drop in value, the shortfall or variation margin would typically be shored up by the investor wiring or depositing additional cash in the brokerage account.
In a forward though, the spread in exchange rates is not trued up regularly but, rather, it builds up as unrealized gain loss depending on which side of the trade being discussed. The result is that forwards have higher credit risk than futures, and that funding is charged differently. In most cases involving institutional investors, the daily variation margin settlement guidelines for futures call for actual money movement only above some insignificant amount to avoid wiring back and forth small sums of cash.
The situation for forwards, however, where no daily true-up takes place in turn creates credit risk for forwards, but not so much for futures.
Simply put, the risk of a forward contract is that the supplier will be unable to deliver the referenced asset, or that the buyer will be unable to pay for it on the delivery date or the date at which the opening party closes the contract.
The margining of futures eliminates much of this credit risk by forcing the holders to update daily to the price of an equivalent forward purchased that day. This means that there will usually be very little additional money due on the final day to settle the futures contract: In addition, the daily futures-settlement failure risk is borne by an exchange, rather than an individual party, further limiting credit risk in futures. This money goes, via margin accounts, to the holder of the other side of the future.
That is, the loss party wires cash to the other party. A forward-holder, however, may pay nothing until settlement on the final day, potentially building up a large balance; this may be reflected in the mark by an allowance for credit risk. Thus, while under mark to market accounting, for both assets the gain or loss accrues over the holding period; for a futures this gain or loss is realized daily, while for a forward contract the gain or loss remains unrealized until expiry.
Note that, due to the path dependence of funding, a futures contract is not, strictly speaking, a European-style derivative: This difference is generally quite small though. With an exchange-traded future, the clearing house interposes itself on every trade.
Thus there is no risk of counterparty default. The only risk is that the clearing house defaults e. From Wikipedia, the free encyclopedia. Government spending Final consumption expenditure Operations Redistribution.
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