The Futures Markets provides detailed coverage of financial futures, theoretical models and hedging strategies, plus the practical uses of these new securities.

Introduction:

Over the past two decades, futures markets have experienced a remarkable expansion in scope, trading volume, and acceptance by the business community. Futures trading began in the midwestern part of the U.S. with contracts on agricultural products. Today, futures contracts on interest rates, foreign exchange, equities, metals, energy products, and agricultural products are traded throughout the world, 24 hours a day. As they have grown, the futures markets have become an integral part of the world’s financial marketplace. Futures contracts are no longer considered to be exotic instruments traded only by financial “rocket scientists”. Instead, they have become important tools that can be used to manage the volatility and global competitive pressures that are now a fact of life for businesses all over the world. As a result, it is important for participants in financial and commodity markets to understand the potential of futures markets for enhancing profitability. This book is designed to help market participants such as institutional investors, traders, arbitrageurs, portfolio managers, corporate financial managers, individual investors, risk managers, researchers, analysts, asset liability managers, trust department managers, investment advisors, financial consultants, and materials managers integrate the futures markets into their overall financial strategies.

The book is organized so that the reader will first acquire a general conceptual foundation and then will apply the concepts to specific markets. We believe that the concepts of pricing, arbitrage, and risk management are essentially the same for all futures markets. While this may seem apparent, it is often true that a trader who operates a foreign exchange arbitrage desk, for example, would be lost if placed on a government security arbitrage desk. We hope that a reader of this book could easily move among a number of different markets.

Chapter 1 provides an overview of the futures markets and introduces students to the mechanics and institutional details of the markets. Chapter 2 develops the theory of the pricing of futures contracts, concentrating on arbitrage and risk-and-return considerations. Chapter 3 develops the theory of risk management, including a discussion of the strategic role-0f hedging within the firm. These three chapters provide a unified framework within which to understand the various markets.

Chapters 4 through 8 apply the concepts developed in the first three chapters to specific markets. Chapter 4 discusses stock index futures markets, including material on program trading and market-timing strategies. Chapter 5 covers short-term interest rate futures markets, concentrating upon the Eurodollar and Treasury bill contracts. Chapter 6 discusses long-term interest rate futures markets, including material on bond pricing, duration, Treasury bonds and municipal bonds.

Chapter 7 covers foreign exchange futures markets, including material on forward markets and covered interest rate parity. Chapter 8 discusses commodity futures markets, including material on agricultural, energy, and metals markets. In all of these applied chapters, we present any institutional details which are necessary to understand the uses of the futures markets.

Chapters 9 and 10 cover options and swaps markets, respectively. These chapters emphasize the relationship between these markets and the futures markets. Throughout the book, we include numerous examples, discussions of current events and summaries of academic research. Where possible, the examples represent situations faced by those in the markets and use real data. The discussions of current events include topics such as program trading and the market break of 1987.