Investments, tenth edition

    3.   Futures contracts are traded on organized exchanges that standardize the size of the contract, the 

grade of the deliverable asset, the delivery date, and the delivery location. Traders negotiate only 

over the contract price. This standardization increases liquidity and means that buyers and sellers 

can easily find many traders for a desired purchase or sale.  

   SUMMARY 

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P A R T   V I

  Options, Futures, and Other Derivatives

    4.   The clearinghouse steps in between each pair of traders, acting as the short position for each long 

and as the long position for each short. In this way traders need not be concerned about the perfor-

mance of the trader on the opposite side of the contract. In turn, traders post margins to guarantee 

their own performance.  

    5.   The long position’s gain or loss between time 0 and time  t  is  F  

 t 

   2   F  

0

 . Because  F  

 T 

   5   P  

 T 

 , the long’s 

profit if the contract is held until maturity is  P  

 T 

   2   F  

0

 , where  P  

 T 

  is the spot price at time  T  and  F  

0

  

is the original futures price. The gain or loss to the short position is  F  

0

   2   P  

 T 

 .  

    6.   Futures contracts may be used for hedging or speculating. Speculators use the contracts to take a 

stand on the ultimate price of an asset. Short hedgers take short positions in contracts to offset any 

gains or losses on the value of an asset already held in inventory. Long hedgers take long posi-

tions to offset gains or losses in the purchase price of a good.  

    7.   The spot-futures parity relationship states that the equilibrium futures price on an asset providing 

no service or payments (such as dividends) is  F  

0

   5   P  

0

 (1  1   r  

 f 

 ) 

 T 

 . If the futures price deviates from 

this value, then market participants can earn arbitrage profits.  

    8.   If the asset provides services or payments with yield  

d, 

 the parity relationship becomes 

 F  

0

   5   P  

0

 (1  1   r  

 f 

   2   d ) 

 T 

 . This model is also called the cost-of-carry model, because it states that 

futures price must exceed the spot price by the net cost of carrying the asset until maturity date  T.   

    9.   The equilibrium futures price will be less than the currently expected time  T  spot price if the spot 

price exhibits systematic risk. This provides an expected profit for the long position who bears the 

risk and imposes an expected loss on the short position who is willing to accept that expected loss 

as a means to shed systematic risk.   

  Related Web sites 

for this chapter are 

available at   www.