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Topic 2: Futures (Futures and Forward Contracts (1.1 Forward Contract (No…
Topic 2: Futures
- Futures and Forward Contracts
Underlying assets
Individual stocks, stock index
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Commodity (gold, oil, platinum ...)
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1.1 Forward Contract
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A contractual agreement between two parties to exchange an asset for cash at a specified forward price (F) at a specified future time (T)
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1.2 Futures Contract
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Futures
Markets: organized Exchange: Chicago Mercantile Exchange (CME), Sydney Futures Ex-change (SFE)
Standardization: standardized (e.g. size, timing, quality of underlying asset)
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Principle of Hedging
Idea of hedging: enter a forward/futures position so that gain (loss) from this position offsets the loss (gain) from the underlying asset.
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2.1 Hedging Strategy
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Thus, do NOT make any prediction of the gold price in hedging
If you follow your prediction, then you are speculating and not hedging
example： What if he predicts the gold price will rise in 2 months? To hedge, should he short/long the forward/futures contract? long
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