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Presentation of module [1]

The first topic covers Forwards and Futures. Forwards and Futures are important financial contracts/assets. Understanding how they work is essential to understand more complex contracts such as swaps and options. This module introduces the contract. The next module will cover how the contract is priced and valued.


Module Learning Objectives
  1. Describe the forward contract.
  2. Explain how to use a forward contract to manage price risk.
  3. Differentiate the forward and futures contracts.
  4. Calculate the payoff from holding a futures position.
  5. Design a hedging strategy using futures and present the solution to a client.
  6. Apply speculative strategies using futures.
  7. Calculate the margin account variations.


Demonstration
The student will demonstrate the accomplishment of these objectives throughout the course by
Readings
Read Chapter 1 with a special focus on sections 1.3 and 1.4 on pages 6 to 8.
    1.3 Forward Contracts
    1.4 Futures Contracts
Read Chapter 2 with a special focus on sections 2.1 to 2.3, 2.4, 2.6 to 2.9, pages 24 to 32, and 36 to 41.
    2.1 Background [information to trading futures]
    2.2 Specifications of a Futures Contract
    2.3 Convergence of Futures Price to Spot Price
    2.4 The Operation of Margin Accounts
    2.6 Market Quotes
    2.7 Delivery
    2.8 Types of Traders and Types of Orders
    2.9 Regulation
Read Chapter 2 with a special focus on section 2.11, pages 43 to 44.
    2.11 Forwards vs Futures contracts
Read Chapter 3, Section 3.1 to 3.3, pages 49 to 58.
    3.1 Basic Principles [of hedging]
    3.2 Arguments For and Against Hedging
    3.3 Basis Risk


Please make sure you have a good understanding of those terms before you attack this chapter. Also, once you are done with reading, check back to see how your understanding of those terms improved.
Terms                       Definition/Explanation
Arbitrage 
Basis 
Cash Settled 
Closing a position 
Contract Size 
Daily Settlements 
Delivery Price 
Forward 
Future 
Futures Price 
Hedging 
Long position 
Open Interest 
Opening a position 
Payoff 
Quote 
Short position 
Speculating 
Spot 
Trading Volume 
Underlying asset

Multimedia

It is important to understand the basic concept of a forward or future contract. Below are videos to introduce the concept. Under this topic, we will:
  1. Introduce forward contracts
  2. Introduce futures contracts
  3. Compare forward and futures contracts
  4. Present how to use forward and futures contracts
  5. Present how to value forward and futures contracts


In this video, I introduce the forward contract, the futures contract, and how to use them: https://streaming.uww.edu/sharevideo/b5efd99f-cb4d-40ab-a8a3-4b53ca194cfb (Links to an external site.)
 (Links to an external site.)
In this video, I discuss the practical aspects of trading futures and introduce the margin account: https://streaming.uww.edu/sharevideo/f11d23d2-7502-4731-b13b-499ac6df1f19 (Links to an external site.)


Here, I cover the margin account in more details: https://streaming.uww.edu/sharevideo/967a8142-b3dc-4347-892e-3db43cdecd63

Self-Assessment

Questions:

1.1,  1.2,  1.5,  1.6,  1.12,  2.25,  3.1,  3.3,  3.11,  3.17.
I do not provide the solutions to those questions. The objective is for you to be confident in your answers. If you have doubts, you are expect to communicate through the forum: Raise Your Hand.


Activity:
In Excel, display the payoff at maturity for a long and a short position in a forward contract. Group the relevant input data and make the graph dynamic (based on the inputs)


Assessment

Week 1 assessment includes: (We can discuss the deadlines if need be.)