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Introduction to Futures
• Some futures contracts (e.g., T-bonds) let the seller choose the
quality of good to deliver, within a specified quality range.
The long profits if the next day’s futures The short profits if the next day’s
price, F(1,T), exceeds the original futures price, F(1,T), is below the
futures price, F(0,T). original futures price, F(0,T).
• The margin required for trading futures differs from the concept
of margin when buying common stock or bonds.
– Margin for Common Stock: The fraction of the asset's cost that
must be financed by the purchaser's own funds. The remainder is
borrowed from the purchaser’s stock broker.
– Margin for Futures: A good faith deposit, or collateral, designed to
insure that the futures trader can pay any losses that may be
incurred. Futures margin is not a partial payment for a purchase.
• On day t+1, the trader who is long a gold futures contract will
receive a margin call, regardless of the futures price of gold on
day t+1.
• The two contracts may be on the same good, but for different
delivery months (called a calendar spread, or an intermonth
spread), or be on two similar goods for delivery in the same
month (called an intercommodity spread, or an intermarket
spread).
Maint.
Gold Cash Begin. Margin Ending
Date Price Flow Equity Call Equity
11/6 285.00 1000
11/6 (end) 286.40 (140) 860 0 860
11/7 288.80 (240) 620 380 1000
11/10 289.00 (20) 980 0 980
11/11 288.60 40 1020 0 1020
11/12 290.70 (210) 810 0 810
11/13 292.80 (210) 600 400 1000
11/14 292.80 0 1000 0 1000
• BTW, this is not the last time we will ask one of these ‘arbitrage’
questions.