Alternative methods of weighting

It is generally considered that capitalization weighted indices give the most accurat indication of the collective movement in corporate asset or liability prices. However two alternative methods of weighting the constituents of equity indices are fowl^,‘equally weighted‘ and ‘price weighted‘. In the case of equally weighted indices, a’ equal amount of money is assumed to be invested in each security in the index Changes in the index thus represent changes in the value of the portfolio. Pri weighted indices reflect the average price of the securities in the index and Chang: in the index represent the average price change of the securities in the index. The Dow—Jones and the Major Market Index of the American Stock Exchange (MMI) a. both of the price weighted form. The FT 30 is a geometric average equally weight index. Only the Major Market Index has a futures contract based upon it. Read more »

Posted: June 28th, 2008 under Commodities Futures, Foreign Exchange Futures, Future Management, Futures Contracts, Futures Trading System, Managed Futures, Short Futures, Stock Futures, investment.
Comments: 6

The dramatic growth of equity index futures has been accompanied by the substantial growth of equity index options. These options come in three forms:

1. Options on the spot index itself such as the contract traded in the London International Financial Futures and Options Exchange — like the futures, these options are settled in cash, rather than by delivery of the underlying securities. Sometimes both European and American options are traded on the same index.
2. Options on the index futures are American options that call for delivery of an equity index futures contract at expiry.

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Posted: June 26th, 2008 under Foreign Exchange Futures, Futures Contracts, Futures Index, Futures Market, Futures Options, Stock Market Futures, Swap Futures.
Comments: 6

The foreign exchange market is an interbank market, in that there is no designated market-place; instead transactions are conducted over the telecommunications system using telephones and computer screens. As a consequence, the foreign exchange (or FX) market is truly global, with all the major commercial banks around the world and the treasury departments of many companies participating. In addition, central banks enter the market in the execution of their monetary and exchange rate policies. There is also a system of brokers who act as intermediaries to supplement the direct contact between participants. As the trading day progresses, the centre of activity moves from one time zone to another, making it possible t trade internationally 24 hours a day.

The transactions in the FX market emanate from international trade, international investment, the hedging of exchange risks, the establishment of speculative positions or arbitraging between mispriced sections of what is a vast market. Read more »

Posted: June 24th, 2008 under Currency Futures, Foreign Exchange Futures, Future Exchange, Future Trading.
Comments: 4

As with all other forms of futures contract, the fair price of short-term interest rate futures should preclude any arbitrage possibilities between the futures market and the underlying cash market. In the case of bank deposit interest rate futures, there should be no arbitrage possibilities between the forward interest rate implied by the future and the forward interest rate available on the appropriate type of bank deposit. For example, a three-month eurodollar futures contract that has 135 days to maturity should not provide any arbitrage possibility with the 135-day forward rate on a three-month eurodollar deposit. Read more »

Posted: June 20th, 2008 under Future Trading, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 5

It was shown that it is possible to lock in a forward rate of interest. However, depositors will only lock in a forward deposit if the rate that results is at least as favourable as the rate that they expect to prevail at the future point in time. If the forward rate implied by the current rates was above investors’ expectations, theinvestors would increase their borrowing for 90 days, causing upward pressure on that rate, and increase their deposits for 180 days, causing downward pressure on that rate, thereby bringing the 90-day forward rate down to current expected levels.

Conversely, if the implied forward rate were below expectations, investors would borrow for the longer term, raising that rate, and deposit for the shorter term, lowering that rate, until the implied forward rate matched expectations. Read more »

Posted: June 20th, 2008 under Future Exchange, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 6

As the name implies, an FRA is an agreement to buy or sell a forward rate of interest on a notional principal amount. Remembering that interbank deposit rate futures also relate to forward rates of interest, the similarity between the two instruments will be obvious. Conceptually, the seller of the FRA undertakes to provide an agreed rate of interest on a notional deposit of a specified size at a previously agreed future date. Thus the FRA locks in the rate of interest on a forward deposit, the forward rate of interest.

An FRA relating to the interest rate on a six-month deposit starting in three months time is referred to in FRA market parlance as a 3 against 9 (or a 3 vs 9) FRA. This clearly indicates that, in this example, the appropriate interest rate is the six- month forward rate three months hence. Read more »

Posted: June 18th, 2008 under Futures Contracts, Futures Prices.
Comments: 3

The fact that these delivery options are available only to the short seller of futures contracts means that collectively they provide that seller with a series of valuable put options over the underlying bonds or notes. It is therefore instructive to delve more deeply into the nature of these options and their influence on bond futures valuation.

The existence of these options depends upon the futures contract specifications. Examples of the options that can be identified are as follows.

1. The short seller’s option to choose the bonds that will be delivered under the futures contract; this is the so-called ‘quality option‘.
2. The short seller’s option to choose the day of delivery within the delivery month: one form of the so-called ‘timing options‘.

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Posted: June 18th, 2008 under Future Trading, Futures Contracts, Futures Market.
Comments: 4

However, this theory of the development of the swaps market assumes that the financial markets remain informationally inefficient and that the benefits of comparative advantage are not arbitraged away. There is no doubt that in the early days of the interest rate and currency swaps markets it was possible to locate such inefficiencies that resulted in generous benefits to both parties, but in the years since the market’s inception the benefits have to some extent been reduced by arbitrage, yet the market still grows dramatically.

Thus there must be some other reason, or reasons, for the existence of the swaps market as the comparative advantage theory assumes that some markets persistently underprice credit risk relative to other markets. Three alternative reasons for the market’s existence can be postulated. Read more »

Posted: June 14th, 2008 under Currency Futures, Foreign Exchange Futures, Future Exchange, Future Investing, Future Management, Future Trading, Interest Rate Futures, Managed Futures, Stock Futures, Stock Market Futures, Swap Futures.
Comments: 4

Currency swaps, which were developed before interest rate swaps, were derivations of the 1970s practice of establishing parallel loans between two parties whereby, for example, company A would lend its domestic currency to company B, in return for a loan of company B’s domestic currency. These parallel loans were often used to manage exchange risk or to circumvent exchange control regulations.

This system of mutual lending had two serious drawbacks. First, there was no automatic off-set of the cash flows between parties. Thus, if company A defaulted on its loan from B, company B would still have to honour its commitment to A. Secondly, although the two loans effectively cancelled each other out, they were still shown on the balance sheets of each company. Read more »

Posted: June 14th, 2008 under Commodities Futures, Crude Oil Futures, Equity Futures, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Managed Futures, Swap Futures.
Comments: 3

Another new area of the swaps market is that of commodity swaps. The mechanics of these swaps are similar to interest rate swaps, in that the swap establishes a fixed commodity price and a floating commodity index, with which the fixed price can be compared. There is a notional principal physical quantity of the commodity which establishes the value of the periodic cash flows. To illustrate these mechanics and give some insight into the use of commodity swaps as risk management instruments, consider the following scenario regarding a manufacturer that is a substantial consumer of copper. Read more »

Posted: June 9th, 2008 under Commodities Futures, Future Broker, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Futures Quotes, Futures Trader, Managed Futures, Swap Futures.
Comments: 5