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FUTURES MARKET.
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Functioning of the market in the U.S.... More...
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Paper Abstract:
Functioning of the market in the U.S. Discusses several issues. The size of the futures market, the trading volume. Various participants in the futures market including speculators, product producers, commodities, band, investors and day traders. Structure of the market and the practice of hedging. Models to determine hedging ration. 1 Table.
Paper Introduction:
FUTURES MARKETS IN THE UNITED STATES
Introduction
This research reviews the functioning of futures markets in the United States. Issues covered in the review are (1) the size of the futures markets, (2) participants in the market, and (3) concepts and procedures applied in futures trading.
Size of Futures Markets
The trading volume in futures market in the United States provides a good reflection of the size of futures trading in the country. The Chicago Board of Trade (CBOT) is the site of the largest volume of futures trading in the United States. Through almost nine-months (three-quarters of the year) in 2002, trading volume has been strong in all four major areas of futures trading on the CBOT. Table 1 [on the following page] presents the trading vol
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In thefinancial futures markets (instruments, derivatives, and currency),corporations, banks, financial instruments traders, and, increasingly, daytraders participate in the futures markets (Jiang, Fung, & Cheng, 2 1).In the stock index futures markets, investors and day traders are strongparticipants in the futures markets (Jiang, Fung, & Cheng, 2 1). Most futures contracts involve a physical commodity, such ascoffee or wheat; however, significant futures markets also exist forfinancial commodities, such as currencies and financial instruments. Participants in the foreign exchange market also deal for future valuedates. 16).Futures Markets Futures contracts provide for the fulfillment of the actual deliveryof the goods covered by such contracts at some future or forward timepoint. D., & Ackert, L. If the cash flows of A are twice those of B,then A has twice the dollar duration of B. S. An outright forward transaction is what the nameimplies, a contract for an exchange of currencies at some future valuedate. (1989, July-August). The basis for determining the hedge ratio in this model is themarket value of the two securities (Association for Investment Managementand Research, 2 2). Quarterly Review of Economics and Finance, 35(2), 119-152.Shuldiner, A., & Norkus, G. (2 2, September 23). Thefocus of futures trading in metals is on commodities used for industrialpurposes, such as copper, as well as precious metals such as gold, whichmay be held as a hedge against volatile currency values (Ferguson & Mann,2 1; Lee & Mathur, 1999; Tashjian, 1995). But even though one sidealways wins and the other side always loses, hedging reduces risk for bothsides" (p. In themetals commodities futures market, commodity producers, industrialcorporations that use metals in their processes, traders, and investorsparticipate in the futures markets (McKenzie & Holt, 2 2). C17). J. Through almost nine-months (three-quarters of theyear) in 2 2, trading volume has been strong in all four major areas offutures trading on the CBOT. A swap is simply a combination of two simultaneous trades: an outrightforward contract and an opposing spot deal. C. (2 2, Summer). Such dealing composes the forward markets or futures markets forcurrencies. Forward (futures) transactions generally occur in two different ways:outright and swap. In practical applications, the concept of hedging works much like theconcept of arbitrage (Shiller, 1995).Hedging The practice of hedging began through the process of naturalderivatives wherein farmers and millers entered into futures contracts toassure smooth cash flows and relatively stable pricing. Active forward markets exist for a few heavily tradedcurrencies and for several time intervals corresponding to actively dealtmaturities in the money market. Issues covered in the review were (1) the size of thefutures markets, (2) participants in the market, and (3) concepts andprocedures applied in futures trading. News releases, market integration, and market leadership. F., & Mann, S. Universal hedging: Optimizing currency risk and reward in international equity portfolios. The measurementof price sensitivity is the weighted-average term to maturity of the cashflows from a security. Since the foreign exchange market isunregulated, standard contract specifications are matters of tradition andconvenience, and they can be modified by the transacting agents (Racine &Ackert, 2 ). Financial Analysts Journal, 16-22.Brooks, B., Henry, O. (1995, Summer). Financial Review, 36(3), 63-98.Jochum, C., & Koders, L. Market Value Naive Model: This model requires $1 market valuein cash position for each $1 market value in futures position. The lead-lag relation between spot and futures markets under different short- selling regimes. Fischer Black (1989) said that, from the perspectives of participantsin international business, hedging is "a 'zero-sum game'. Futures contracts forfinancial commodities are affected both by changes in global and domesticmacroeconomic variables and volatile international and domestic politicalconditions (Jochum & Koders, 1998). (1995, Summer). It is often preferred to used arelative duration measure, where the timing and relative magnitude of thecash flows are the focus, as opposed to scaling. A naivehedging technique suggests that a futures position should have an equalmagnitude and an opposite sign compared to the spot position. For example, a bank might"swap in" six-month yen by simultaneously buying spot yen and selling six-month forward yen. Dollar duration is an absolute measure, if portfolios A and B haveidentically timed cash flows. The traditional, and moreintuitive, measure of duration is the Macaulay Duration. T., & Persand, G. Three of thesemodels are as follows: Face Value Naive Model: This model requires $1 face value incash position for each $1 face value in futures position. Quarterly Review of Economics and Finance, 35(2), 153-162. Summary This research reviewed the functioning of futures markets in theUnited States. Energy Journal, 22(3), 1-29.Racine, M. (1996, June). "Buying prices" on the commodity futures market. International Monetary Fund Staff Papers, 45(3), 486-521.Lee, C. A commoditysuch as beef can be affected in the futures market by health scares such a"mad-cow disease" (Luchetti, 1997, p. (2 2, April). In effect, the swapping bank isborrowing yen for the six months of the outright deal. Journal of Financial Research, 23(2), 129-143.Shiller, R. Calculationof the hedge ratio reflects the relative change in values of the spotsecurity and the futures security anticipated over the life of the hedge.The basis for determining the hedge ratio in this model is the face valueof the two securities (Association for Investment Management and Research,2 2). Financial Review, 31(4), 1-8.Luchetti, A. Final volume and open interest summary. When outrights are concluded for a commercialclient, they are usually hedged immediately by swapping the forwardposition to spot. The weights are the present value of the cash flowdivided by the price (Association for Investment Management and Research,2 2). T. Charlottesville, Virginia: Association for Investment Management and Research.Black, F. In theagricultural commodities futures market, product producers, agriculturalcommodities traders, food processors, and even restaurant chainsparticipate in the futures markets (Shuldiner & Norkus, 1996). Optimal futures contract design. futures markets in the united states Introduction This research reviews the functioning of futures markets in the UnitedStates. If a hedger is sufficiently skilled, risk can be fully hedged - asituation where the transaction will have no impact on the owner's assets(Brooks, Henry, & Persand, 2 2). Other exchanges in the United States offer futures trading; however,the trading volume on the other exchanges does not approach that on theCBOT (Christie-David, Chaudhry, & Khan, 2 2). Table 1 [on the following page] presents thetrading volume through 2 September 2 2 on the CBOT. The interbank market for outrights is verysmall, because outright trading implies an exchange rate risk untilmaturity of the contract. W. ReferencesAssociation for Investment Management and Research. The hedger, bylimiting risk, purposefully limits the potential of any gain; however, mosthave no desire to create a no impact situation (Shuldiner & Norkus, 1996). Cornell Hotel & Restaurant Administration Quarterly, 37(3), 3 -35.Tashjian, E. investors gain on theirhedges, Japanese hedgers lose, and vice versa. investors hedge their Japanese investments, and Japanese investorshedge their U.S. The ChicagoBoard of Trade (CBOT) is the site of the largest volume of futures tradingin the United States. Futures contracts for commodities such as grains are affected bywhether conditions, falling supplies, and changing demand. (2 1, January). Execution costs and their intraday variation in futures markets. F. (2 , Summer). Aggregate income risks and hedging mechanisms. The use of naturalderivatives led to the development and use of artificial derivatives(Shiller, 1995). Applied Economics, 34(12), 1519-1532.Pindyck, R. Price Sensitivity (Duration) Model: Dollar duration is not theonly measure of price sensitivity used. (2 2). Fears of mad-cow disease send cattle prices sliding. Hedging is an action or a series of actions takenby either a buyer or a seller to protect assets against a change in prices. (2 2, August 15). X. After all, ifU.S. Size of Futures Markets The trading volume in futures market in the United States provides agood reflection of the size of futures trading in the country. The volume of futurestrading does not approach that for stocks, but it is growing rapidly.|Table 1 - CBOT Trading Volume: 1 January 2 2 - 2 September 2 2 ||Type of Futures Contract |Volume [Number of Contracts] ||Agricultural Commodities |45,696,612 ||Financial Instruments |1 4,334,179 ||Stock Index Futures |45,92 , 1 ||Metals Commodities |138,93 ,924 ||Energy Commodities |114,231,4 5 ||Total Futures Contracts |449,113,13 ||Source: Chicago Board of Trade, 2 2 | Participants in the Futures Markets In part, the source of the participants in the future markets in theUnited States depends upon the type of futures contract involved.Speculators participate in all types of futures markets. Journal of Financial Research, 25(2), 223-245.Ferguson, M. Journal of Business, 74(1), 125- 16 .Jiang, L., Fung, J. Time-varying volatility in Canadian and U.S. investments, then when U.S. (1998, September). Concepts and Procedures Applied in Futures Trading The focus of this discussion is on the structure of futures marketsand hedging with a view to understanding the functioning of futures marketsand hedging in practice. "Outrights" generally occur only between market-making banks andtheir commercial clients. Retrieved from the Internet on 2 2- 9-23 at: http://www.cbot.com/Christie-David, R., Chaudhry, M., & Khan, M. The dynamics of commodity spot and futures markets: A primer. Journal of Business, 75, 333-352.Chicago Board of Trade. The hedgeratio is that ratio where the price changes of both the spot security andthe futures security are equal in magnitude and opposite in sign.Calculation of the hedge ratio reflects the relative change in values ofthe spot security and the futures security anticipated over the life of thehedge. (2 1, June). Issues covered in the review are (1) the size of the futuresmarkets, (2) participants in the market, and (3) concepts and proceduresapplied in futures trading. (2 1, August). The influence of information arrival on market microstructure: Evidence from three related markets. The effect of asymmetries on optimal hedge ratios. M., & Holt, M. Futures markets also can be requested andmade for other maturities. Rather, the usualintent a hedger is to limit the extent of any risk, while still preservingthe potential for gain, through the set of transactions. Does the introduction of futures on emerging market currencies destabilize the underlying currencies? Futures markets provide an organized venue for the making of suchcontracts. There are different models available for determining a hedging ratio.A familiarity with these models provides a better understanding of thefunctioning of the hedging process in futures markets. A naive hedgingtechnique suggests that a futures position should have an equal magnitudeand an opposite sign compared to the spot position. Market efficiency in agricultural futures markets. The foreignexchange market-maker swaps in yen - rather than simply borrow yen on atime deposit-because banks maintain separate foreign exchange and moneymarket accounts for administrative reasons (Racine & Ackert, 2 ). K. (1999, February). I., & Mathur, I. Such a swap might be used to hedge an outright purchaseof six-month yen from a bank customer. In the energycommodities futures markets, energy producers, traders, and very largeenergy consumers are the major participant groups in the futures markets(Pindyck, 2 1). The typical intent of the hedger,however, usually is not to enter into a series of transactions that willinsure that no impact on the hedger's assets occurs. This procedure removes the exchange rate risk and leavesonly interest rate risk (Racine & Ackert, 2 ). stock index and index futures markets: A multivariate analysis. (1997, April 17). T. The hedge ratio isthat ratio where the price changes of both the spot security and thefutures security are equal in magnitude and opposite in sign. W., & Cheng, L. Wall Street Journal, C17.McKenzie, A. CFA program.
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