Course - Chapter 6
Terms
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- Derivatives are...
- derived from an underlying asset, commodity, interest rate, market index, etc.
- Who developed futures?
- The Chicago Board of Trade
- What is the purpose of future derivatives? (1)
- 1. to provide commercial certainty to both producers and users of soft commodities.
- Is the trading of futures also open to speculators?
- Yes
- What is a covered future?
- The seller of the instrument actually has the underlying commodity (e.g. a nickel mine).
- What is a naked future
- the seller does not have the underlying commodity (e.g. a speculator)
- What are the dangers for speculators trading in futures? (1)
- 1. If they do not close the contract (i.e. sell it to someone else) before the specified delivery date, the commodity will be delivered to them.
- What else can futures be used for?
-
1. They can be used to hedge the risk of an existing position
2. Future contract can be entered into to sell shares at a specific date
3. MM then knowns maximum loss exposure.