1
Chapter 13
Financial Futures Markets
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
2
Chapter Outline

Background on financial futures

Interpreting financial futures tables

Valuation of financial futures

Explaining price movements of bond
futures contracts

Speculating with interest rate futures

Closing out the futures position
3
Chapter Outline (cont’d)

Hedging with interest rate futures

Bond index futures

Stock index futures

Single stock futures

(cont’d)

Interest rate futures are on debt securities
such as T-bills, T-notes, T-bonds, and
Eurodollar CDs

Stock index futures are on stock indexes

Settlement dates are in March, June,
September, and December

Most financial futures are traded on the
Chicago Board of Trade or the Chicago
Mercantile Exchange
6
Background on Financial Futures
(cont’d)

Purpose of trading financial futures

Traded either to speculate on prices of securities or to hedge
existing exposure to security price movements

Speculators take positions to profit from expected changes in
the price of futures contracts over time

Day traders attempt to capitalize on price movements during a
single day

Position traders maintain their futures positions for longer


Many types of futures contracts now trade over the
counter

Are more personalized and can be tailored to the specific
preferences of the parties involved
9
Background on Financial Futures
(cont’d)

Steps involved in trading futures (cont’d)

Customers must establish margin deposits with their brokers

Initial margin is typically between 5 and 18 percent of a futures’
full value

A futures contract price is “marked to market” daily

Customers may receive a margin call if the value moves in an
unfavorable direction

A market order is executed at the prevailing price of the futures
contract

A limit order is executed only if the price is within the limit
specified
10
Background on Financial Futures
(cont’d)

Open High Low Settle Change Settle Change Open
Sept 2005 93.80 94.05 93.80 94.05 +.28 5.95 –.28 2,519
12
Characteristic of
Futures Contract
Treasury Bond Futures Treasury Note Futures
Size $100,000 face value $100,000 face value
Deliverable grade Treasury bonds maturing at least 15
years from date of delivery is not
callable; coupon rate is 8%
Treasury notes maturing at least
6.5 years but not more than 10
years from the first day of the
delivery month; coupon rate is
6%
Price quotation In points ($1,000) and thirty-seconds
of a point
In points ($1,000) and thirty-
seconds of a point
Minimum price
fluctuation
One thirty-second (1/32) of a point,
or $31.25 per contract
One thirty-second (1/32) of a
point, or $31.25 per contract
Daily trading limits Three points ($3,000) per contract
above or below the previous day’s
settlement price
Three points ($3,000) per
contract above or below the


Participants in the Treasury bond futures market closely
monitor the same economic indicators monitored by
participants in the Treasury bond market:

Employment

GDP

Retail sales

Industrial production

Consumer confidence

Inflation indicators

Indicators that reflect the amount of long-term financing
15
Speculating with Interest Rate
Futures

Involves trading T-bill futures

The position taken depends on interest rate
expectations

If interest rates are expected to decline, purchase T-bill futures

If interest rates are expected to increase, sell T-bill futures