List of figures
List of tables
Preface
CHAPTER 1. INTRODUCTION
What is a Commodity?
Undifferentiated vs. Branded Products
Perfect Competition Model
Inelastic Supply and Demand
What is a Derivative?
Price Stability and Certainty
Separating the Pricing and Exchange Functions
Forward Contracts
Futures Contracts
Options
Swaps
Organization of this Book
Forwards, Futures, and Price Discovery
Summary
CHAPTER 2. TRADING FUTURES AND OPTIONS
Pit Trading
The Trading Pit
Order Types and Order Execution
Open Outcry and Hand Signals
Price Reporting
Electronic Trading
The Role of Technology
Components of Electronic Trading
Central Limit Order Book
Matching Engine
Front End
Customer Protection Features
Benefits vs. Costs of Electronic Trading
CHAPTER 3. UNDERSTANDING AND INTERPRETING FUTURES PRICES
How Futures Prices Are Quoted
Futures Prices and Summary Price Measures
Tick Size and Contract Size
Commodity Codes and Month Codes
Contract Expiration
Long and Short Positions
Measures of Trading Activity
Volume and Open Interest
Trading Impact on Volume and Open Interest
Other Relationships between Volume and Open Interest
Interpreting Price Differences: Time, Space, and Form
Price Differences Due to Time: Carrying Costs
Carrying Costs and Convenience Yield
The Forward Curve
Forward Curve for a Normal Market
Forward Curve for an Inverted Market
Effects of Seasonality
Forward Curve for Nonstorable Commodities
Price Differences Due to Space: Transportation Costs
Locational Price Differentials
Locational Premiums and Discounts
Price Differences Due to Form: Processing Costs
Input-Output and Quality Differentials
Spreads: Processing, Intra-Commodity, and Inter-Commodity
Combinations of Time, Space, and/or Form
CHAPTER 4. MARGINS, CLEARING, DELIVERY, AND FINAL SETTLEMENT
Margins in Futures Trading
Initial Margin, Maintenance Margin, and Margin Calls
The Clearing House and Clearing Firms
The Clearing House as Central Counterparty
The Daily Settlement Process
Margin Account Example
Final Settlement via Delivery
The Physical Delivery Process
Delivery as Arbitrage
Steps in the Delivery Process
Final Settlement via Cash Settlement
CHAPTER 5. MARKET REGULATION
Futures as Contracts
Contract Specifications
Par Quality
Premiums and Discounts for Quality Variations
Quantity
Delivery Location
Delivery Date
Cash Settlement vs. Physical Delivery
Position Limits
Spot Limits
Non-Spot Limits
All-Months-Combined Limits
Position Limits for Hedgers
Reportable Levels
Minimum Price Increment
Daily Price Limits
Expiration Date and Last Trading Date
Regulation by Exchanges
Regulation by the Federal Government
Legislative History
Regulation and the Perfect Competition Model
Regulatory Purpose
Creation of the Commodity Futures Trading Commission
Authority and Jurisdiction
Organization
Self-Regulation by the Industry
Applications in Other Sectors and Countries
Appendix 5.1
CHAPTER 6. HEDGING WITH FUTURES
The Role of Correlation
Hedging Against a Price Increase
Loss on Cash Position, Gain on Futures Position
Gain on Cash Position, Loss on Futures Position
No Gain or Loss on Cash Position, No Gain or Loss on Futures Position
Stabilizing the Net Purchase Price
Hedging Against a Price Decrease
Loss on Cash Position, Gain on Futures Position
Gain on Cash Position, Loss on Futures Position
No Gain or Loss on Cash Position, No Gain or Loss on Futures Position
Stabilizing the Net Sale Price
More on the Role of Correlation: An Example from the Corn Market
Price Changes vs. Prices Levels: The Importance of Returns
CHAPTER 7. HEDGING AND THE BASIS
Hedging and Basis Changes
Actual Values and Expected Values
Basis Behavior and the Correlation of Returns
Long Hedging and Basis Behavior
Rising Prices, Positive Initial Basis, and Basis Strengthens
Rising Prices, Positive Initial Basis, and Basis Weakens
Rising Prices, Negative Initial Basis, and Basis Strengthens
Rising Prices, Negative Initial Basis, and Basis Weakens
Falling Prices, Positive Initial Basis, and Basis Strengthens
Falling Prices, Positive Initial Basis, and Basis Weakens
Falling Prices, Negative Initial Basis, and Basis Strengthens
Falling Prices, Negative Initial Basis, and Basis Weakens
Basis Impact on Long Hedging Results
Short Hedging and Basis Behavior
Falling Prices, Positive Initial Basis, and Basis Strengthens
Falling Prices, Positive Initial Basis, and Basis Weakens
Falling Prices, Negative Initial Basis, and Basis Strengthens
Falling Prices, Negative Initial Basis, and Basis Weakens
Rising Prices, Positive Initial Basis, and Basis Strengthens
Rising Prices, Positive Initial Basis, and Basis Weakens
Rising Prices, Negative Initial Basis, and Basis Strengthens
Rising Prices, Negative Initial Basis, and Basis Weakens
Basis Impact on Short Hedging Results
CHAPTER 8. HEDGING ENHANCEMENTS
Types of Hedges
Anticipatory Hedge
Inventory Hedge
Rolling a Hedge
Reasons for Rolling a Hedge
Rolling Forward a Long Hedge
Rolling Back a Short Hedge
Limits on Rolling Forward or Rolling Back
Cross-Hedging
Why Cross-Hedging is Necessary
Cross-Hedging Grain Sorghum Using Corn Futures
Regression Equation
Hedge Ratio
Converting the Hedge Ratio into Futures Contracts
Hedging Effectiveness
Using Price Changes vs. Price Levels in Regressions
CHAPTER 9. PROFIT MARGIN HEDGING AND INVERSE HEDGING
Profit Margin Hedging
Soybean Crush Margin
Crude Oil Refining Margin
Cattle Feeding Margin
Other Processing Spreads
Inverse Hedging
Long Inverse Hedge with a Short Forward Contract
Using Long Futures to Offset a Short Forward
Drawbacks of a Long Inverse Hedge
Short Inverse Hedge with a Long Forward Contract
Using Short Futures to Offset a Long Forward
Drawbacks of a Short Inverse Hedge
CHAPTER 10. HEDGING AND BASIS TRADING
Redefining the Basis and the Cash Price
Basis as a Tangible Value
Defining the Impact of Basis Changes
Commercial Hedging
Short Hedging - Buying the Basis
Long Hedging - Selling the Basis
CHAPTER 11. BASIS TRADING AND ROLLING A HEDGE
Rolling a Hedge to Capture a Favorable Basis
Rolling Forward a Long Hedge
Spread-Adjusted Futures Prices
Spread-Adjusted Basis Values
Rolling Back a Short Hedge
Spread-Adjusted Futures Prices
Spread-Adjusted Basis Values
Spreads, the Forward Curve, and Basis Behavior
Spread Impact on Hedging Results
Basis Impact of an Implicit Bear Spread
Basis Impact of an Implicit Bull Spread
CHAPTER 12. SPECULATION IN FUTURES
Speculation vs. Investment
Speculative Styles
Scalping
Position Trading
Spreading
Intra-Market Spreads
Inter-Market Spreads
Speculators and Speculative Impact
Commitments of Traders
Open Interest as the Measure of Commitment
Reportable Traders by Specific Occupation or Activity
Producer/Merchant/Processor/User
Swap Dealers
Managed Money
Other Reportables
Total Reportable Positions
Nonreportable Positions
Percent of Open Interest Held by Largest Traders
Speculative Participation in Commodity Futures
Speculative Vehicles
Returns to Speculation
CHAPTER 13. INTRODUCTION TO OPTIONS ON FUTURES
How Options Work
An Example from Real Estate
Options on Futures
Option Buyers and Sellers
Exercise or Abandon
In the Money vs. Out of the Money
Intrinsic Value of an Option
Similarities between Options and Insurance
Option Trading
Time Value of an Option
Time Value Decay
Exercise and Assignment
Potential Gains and Losses, Margins and Margin Calls
Automatic Exercise
Option Expiration Date and Futures Delivery
Trading Venue and Method
Clearing and Settlement
Market Regulation
Options on Actuals
CHAPTER 14. OPTION PRICING
The Black Model
Call Option Formula
Call Option Pricing Example
Put Option Formula
Put Option Pricing Example
Measuring Volatility
Model Assumptions and Shortcomings
Put-Call Parity
Pricing with Put-Call Parity
Identifying and Arbitraging Price Discrepancies
Option Sensitivity and the Greeks
Properties of Delta and Trading Applications
Properties of Gamma
Properties of Theta
Properties of Rho
Properties of Vega
Summary
CHAPTER 15. PROFIT TABLES AND PROFIT DIAGRAMS
Futures and Cash Positions: Linear Profits
Long Futures
Short Futures
Long Cash
Hedging Long Cash with Short Futures
Options Positions: Nonlinear Profits
Long Calls
Short Calls
Long Puts
Short Puts
Hedging Long Cash with Long Puts
Short Hedging with Long Puts vs. Short Futures
Hedging Long Cash with Short Calls
Short Hedging with Short Calls vs. Short Futures
Hedging Short Cash with Long Futures
Hedging Short Cash with Long Calls
Long Hedging with Long Calls vs. Long Futures
Hedging Short Cash with Short Puts
Long Hedging with Short Puts vs. Long Futures
Discussion
CHAPTER 16. HEDGING WITH OPTIONS
Option-Based Hedging Strategies
Floor
Ceiling
Collar
Zero-Cost Collar
Inverse Collar
Covered Call and Covered Put
Delta-Neutral Hedging
Impact of Changing Intrinsic Value and Time Value
Profit Diagrams Prior to Expiration
Dynamic Hedging Example
Discussion
Delta Hedging by Option Market Makers
Synthetic Futures and Options
Synthetic Options
Synthetic Futures
Profit Diagram for Synthetic Long Futures
Profit Diagram for Synthetic Short Futures
Other Uses for Synthetic Positions
CHAPTER 17. SPECULATING WITH OPTIONS
Intrinsic Value Strategies
Time Value Strategies
Volatility Strategies
Straddle
Strangle
Other Volatility Strategies
Spread Strategies
Conversion and Reversal
Box Spread
Bull Spreads and Bear Spreads
Bull Call Spread
Bear Call Spread
Bull Put Spread
Bear Put Spread
Identical Results from Bull and Bear Spreads
Box Spread using Bull and Bear Spreads
CHAPTER 18. COMMODITY SWAPS
Swaps and Forwards
Swap Features and Applications
Fixed and Floating, Long and Short
Commodity Swap Example
First Settlement Results
Second Settlement Results
Subsequent Settlements
Swap Contract Specifications
Flexibility vs. Liquidity
The Market for Commodity Swaps
Index
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