Chapter 15
Commodities and Financial Futures
◼ Outline
Learning Goals
I. The Futures Market
A. Market Structure
1. Futures Contracts
3. Major Exchanges
B. Trading in the Futures Market
2. Margin Trading
Concepts in Review
II. Commodities
A. Basic Characteristics
1. A Commodities Contract
3. Return on Invested Capital
B. Trading Commodities
2. Spreading
Concepts in Review
III. Financial Futures
A. The Financial Futures Market
1. Foreign Currencies, Interest Rates, and Stock Indexes
3. Prices and Profits
B. Trading Techniques
1. Speculating in Financial Futures
a. Going Long a Currency Contract
b. Going Short an Interest Rate Contract
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©2011 Pearson Education, Inc. Publishing as Prentice Hall
examinations of the executives’ personal finances. This examination could deter executives from
committing fraud for personal financial gain.
Chapter 15 Commodities and Financial Futures 297
However, the greedy executive who wants to meet earnings targets cannot be stopped by even the
(b) Regulations were implemented to help restore that faith and direct the business practices of
companies. Sarbanes-Oxley, the 2002 legislation that increased corporate governance requirements
for public companies, has certainly had an impact on fraud. In part, the act calls for the establishment
◼ Suggested Answers to Discussion Questions
1. (a) CBT, KC, MPLS, CME, NYBOT, CMX, NYM
2. (a) July 2010 corn: contract price is 364’6 or $3.6475; contract size is 5,000 bushels, so contract
value is $18,237.50.
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The net loss on the hedge is $800 ($499,200 total profit on the hedge minus $500,000 loss on
11. 62,500 $1.6683 = $104,268.75
12. Dollars = $1.1050 125,000 = $138,125
13. If the American currency speculator wants to profit on a decline in the value of the Canadian dollar,
he should short Canadian dollars futures contracts. Each futures contract is for $100,000 (Can.).
14. The purchase price of the gold call option would be:
The value of the same call on its expiration date would be:
= −
= −
=
=
Value (Market price of gold Striking price) 100
($525 $480) 100
$45 100
$4,500
Thus, the profit would be:
◼ Solutions to Case Problems
Case 15.1 T.J.’s Fast–Track Investments: Interest Rate Futures
This case requires a review of the characteristics and risks of using financial futures. The student is asked
for a specific evaluation of a T-note futures contract, including a review of the mechanics of the market
and the pricing of contracts.
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Since the Pernelli portfolio lost $45,000 and since each “point” in a S&P 400 composite contract
is worth $500, the index would have to drop 90 points ($45,000 ÷ $500) to a new price of
(c) 1. Profit from futures contract:
2. The stock index futures hedge failed simply because the Pernelli portfolio did not behave exactly
like the S&P 400 Midcap Index. But that’s the nature of the animal; for rarely would we expect
(d) This hedge would be set up with puts. Accordingly, the put would cost:
It would have a value at the end of the investment period of:
Value of put = (Strike price − Market price) $500
While it takes a little less money to set up a put hedge than a futures hedge, it (the put hedge) is not
always as effective, as this problem demonstrates. Clearly, the same type of protection is obtained,
◼ Answers to CFA Questions (Part VI)
1. a
Chapter 15 Commodities and Financial Futures 303
6. c
◼ Outside Project
Chapter 15 What Is the Mystery in Futures Markets?
For most investors, the futures markets are about as familiar as the Hong Kong Stock Exchange. These
markets are highly specialized and can be quite volatile. However, knowledge of the futures market can be
useful in reducing risk through hedging, or in improving the return on a portfolio through direct speculation.
The purpose of this project is to get you directly involved in the futures market so that you can judge the
volatility of the contracts and gain some valuable insight into how futures contracts behave.
The active trading life of any futures contract is relatively short. This means that for this project you are
only going to need weekly trading data going back just three months. The contract that is closest to its
expiration is usually the most active and the one that you should study. Select one contract in each of the
following categories: stock index futures, interest rate futures, and foreign currency futures. On a graph,
plot the weekly closing prices of the stock index, interest rate, and foreign currency futures contracts you
selected. Now calculate the profit and holding period return, over the three-month period covered in this
project, from all three contracts; do so first assuming you’re long in the contracts and then assuming you
short sold each. Your calculations should assume a 5% initial margin on the futures. Comment on your
holding period returns and the influence that margin has on the gain or loss. Also, comment on the
observed price volatility of these contracts, and discuss how such volatility affected the profits (or losses)
you recorded.