FUTURES AND FIXED

INCOME MARKETS
GUICO, NIKKI ANDREA C.
MATA, NICE JUDITH G.
PARALE, JUSTINE MAE
SERRANILLO, BEA
DEFINITION OF TERMS
Futures Contract - legal agreement to buy or sell a
particular commodity or asset at a predetermined
price at a specified time in the future.

Commodity Futures Market – a physical or electronic

marketplace where traders buy and sell commodity
futures contracts.
DEFINITION OF TERMS
Long Position - a buyer of futures contracts. A long
position is the number of purchase contracts held by
the buyer.

Short Position - a seller of futures contracts. A short

position is the number of sales contracts held by the
seller
DEFINITION OF TERMS
Clearinghouse – the entity of a futures exchange that
acts as counterparty to every transaction. The
clearinghouse “clears” every transaction by becoming
the buyer to the seller and the seller to the buyer. The
clearinghouse always holds an equal number of buy
and sell contracts. The purpose of the clearinghouse
is to guard against default.
DEFINITION OF TERMS
Futures Delivery – the transfer of commodity
ownership from the short (the seller) to the long (the
buyer) during the delivery period. Ownership is
transferred by the surrender of warehouse receipts or
some other negotiable instrument specified by the
contract.
DEFINITION OF TERMS
Position Limit – the maximum number of buy or sell
contracts that a speculator can hold at one time in a
futures contract. Normally, exchanges require position
limits to be reduced as the delivery period approaches.
DEFINITION OF TERMS
Order Types

• Market order – an order to buy or sell at the market

• Limit order – an order to buy at a specific price (or lower) or to sell at a

specific price (or higher)

• Stop order – an order to liquidate an existing position. A buy stop is

entered against a short position at a price higher than current trading
price; a sell stop is entered against a long position at a price lower than
current trading price. Stop orders are intended to limit losses..
DEFINITION OF TERMS
Backwardation - the condition in a futures market in
which futures contracts are trading at successively
lower prices over a particular time span

e.g. July corn = $6.70, Sept corn = $6.30, Dec corn =

$6.10.

Also called an inverted market, backwardated

markets indicate low supply relative to demand.
DEFINITION OF TERMS
Contango - the condition in a futures market in which
futures contracts are trading at successively higher
prices over a particular time span (the opposite from
backwardation)

e.g. Sept wheat = $6.34, Dec wheat = $6.74, March

wheat = $7.00.

Also called a carry market, contango markets indicate

adequate or ample supply relative to demand.
APPLICATION IN BUSINESS
TYPE OF FUTURE CONTRACTS

● Commodity futures such as in crude oil, natural

gas, corn, and wheat
● Stock index futures such as the S&P 500 Index
● Currency futures including those for the euro and
the British pound
● Precious metal futures for gold and silver
● U.S. Treasury futures for bonds and other products
APPLICATION IN BUSINESS
SAMPLE PROBLEM

Let's say a trader wants to speculate on the price of crude oil by entering
into a futures contract in May with the expectation that the price will
be higher by years-end. The December crude oil futures contract is
trading at $50 and the trader locks in the contract.

Since oil is traded in increments of 1,000 barrels, the investor now has a
position worth $50,000 of crude oil (1,000 x $50 = $50,000). However,
the trader will only need to pay a fraction of that amount up front—the
initial margin that they deposit with the broker.
APPLICATION IN BUSINESS
From May to December, the price of oil fluctuates as does the value of
the futures contract. If oil's price gets too volatile, the broker may ask for
additional funds to be deposited into the margin account—a
maintenance margin.

In December, the end date of the contract is approaching, which is on

the third Friday of the month. The price of crude oil has risen to $65, and
the trader sells the original contract to exit the position.
APPLICATION IN BUSINESS
The net difference is cash settled, and they earn $15,000, less any fees
and commissions from the broker ($65 - $50 = $15 x 1000 = $15,000).

However, if the price oil had fallen to $40 instead, the investor would
have lost $10,000 ($40 - $50 = negative $10 x 1000 = negative $10,000).
APPLICATION IN BUSINESS