TheFinancial Futures Primer provides the reader with an introduction to the futures markets in general and financial futures in particular. All of the futures contracts explored in the text are approached by a common pricing framework-the proposition that rational prices preclude arbitrage profits.To ensure that the mathematical demands placed upon the reader are minimal, there is an uncomplicated, applied explanation provided for each topic. As each concept or valuation technique is introduced, it is explained in detail, the relevant formula is presented, and a calculation example is presented.The text also emphasises the use of financial futures in risk management. While theFinancial Futures Primer features ample examples of speculative strategies that can be implemented with these instruments, the focus of the application examples is the management of pre-existing risk.This brief, yet comprehensive, overview of the complex topics surrounding futures makes the Financial Futures Primer a valuable resource for professionals as well as an ideal supplement for advanced undergraduate courses in finance and economics and MBA level investments courses.

ROBERT W. KOLB was John S. and James L. Knight Professor of Finance at the University of Miami until 1995. He is author or coauthor of finance texts on a range of topics including futures, options, financial derivatives, investments, corporate finance, and financial institutions. He was founder and president of Kolb Publishing Company, sold to Blackwell Publishers in 1995. His research has been published in Financial Management, the Journal of Finance, the Journal of Risk and Insurance, the Journal of Financial Economics, and the Journal of Futures Markets.

PREFACE

ix

CHAPTER 1 FUTURES MARKETS: INTRODUCTION

1

(52)

OVERVIEW

1

(1)

THE CONCEPT OF ARBITRAGE

2

(1)

ORIGINS OF FORWARD CONTRACTING

3

(2)

FORWARD VERSUS FUTURES MARKETS

5

(20)

EXCHANGES AND TYPES OF FUTURES

25

(5)

ELECTRONIC FUTURES TRADING

30

(4)

PURPOSE OF FUTURES MARKETS

34

(3)

BROKERS, ADVISORS, AND COMMODITY FUND MANAGERS

37

(4)

REGULATION OF FUTURES MARKETS

41

(6)

TAXATION OF FUTURES TRADING

47

(1)

CONCLUSION

48

(1)

NOTES

48

(5)

CHAPTER 2 FUTURES PRICES

53

(54)

OVERVIEW

53

(1)

READING FUTURES PRICES

54

(7)

THE BASIS AND SPREADS

61

(5)

MODELS OF FUTURES PRICES

66

(27)

FUTURES PRICES AND EXPECTATIONS

93

(3)

FUTURES PRICES AND RISK AVERSION

96

(8)

CONCLUSION

104

(1)

NOTES

105

(2)

CHAPTER 3 USING FUTURES MARKETS

107

(32)

OVERVIEW

107

(1)

PRICE DISCOVERY

108

(3)

SPECULATION

111

(10)

SPECULATIVE PROFITS

121

(3)

HEDGING

124

(12)

CONCLUSION

136

(1)

NOTES

137

(2)

CHAPTER 4 INTEREST RATE FUTURES: INTRODUCTION

139

(52)

OVERVIEW

139

(1)

INTEREST RATE FUTURES CONTRACTS

140

(16)

PRICING INTEREST RATE FUTURES CONTRACTS

156

(16)

SPECULATING WITH INTEREST RATE FUTURES

172

(7)

HEDGING WITH INTEREST RATE FUTURES

179

(10)

CONCLUSION

189

(1)

NOTES

190

(1)

CHAPTER 5 INTEREST RATE FUTURES: REFINEMENTS

191

(50)

OVERVIEW

191

(1)

THE T-BOND FUTURES CONTRACT IN DETAIL

192

(15)

INTEREST RATE FUTURES MARKET EFFICIENCY

207

(4)

APPLICATIONS: EURODOLLAR AND T-BILL FUTURES

211

(12)

HEDGING WITH T-BOND FUTURES

223

(13)

CONCLUSION

236

(1)

NOTES

237

(4)

CHAPTER 6 STOCK INDEX FUTURES: INTRODUCTION

241

(32)

OVERVIEW

241

(1)

THE FOUR INDEXES

242

(7)

STOCK INDEX FUTURES CONTRACTS

249

(2)

STOCK INDEX FUTURES PRICES

251

(5)

INDEX ARBITRAGE AND PROGRAM TRADING

256

(7)

SPECULATING WITH STOCK INDEX FUTURES

263

(3)

THE DEMISE OF BARINGS BANK

266

(1)

RISK MANAGEMENT WITH STOCK INDEX FUTURES

267

(4)

CONCLUSION

271

(1)

NOTES

271

(2)

CHAPTER 7 STOCK INDEX FUTURES: REFINEMENTS

273

(46)

OVERVIEW

273

(1)

STOCK INDEX FUTURES PRICES

274

(6)

REAL WORLD PROGRAM TRADING

280

(4)

HEDGING WITH STOCK INDEX FUTURES

284

(9)

ASSET ALLOCATION

293

(3)

PORTFOLIO INSURANCE

296

(3)

INDEX FUTURES AND STOCK MARKET VOLATILITY

299

(9)

INDEX FUTURES AND STOCK MARKET CRASHES

308

(6)

CONCLUSION

314

(1)

NOTES

315

(4)

CHAPTER 8 FOREIGN EXCHANGE FUTURES

319

(40)

OVERVIEW

319

(1)

PRICE QUOTATIONS

320

(2)

GEOGRAPHICAL AND CROSS-RATE ARBITRAGE

322

(3)

FORWARD AND FUTURES MARKET CHARACTERISTICS

325

(5)

MORE FUTURES PRICE PARITY RELATIONSHIPS

330

(10)

FOREIGN EXCHANGE FORECASTING ACCURACY

340

(2)

THE EFFICIENCY OF FOREIGN EXCHANGE FUTURES MARKETS

342

(3)

SPECULATION IN FOREIGN EXCHANGE FUTURES

345

(5)

HEDGING WITH FOREIGN EXCHANGE FUTURES

350

(5)

CONCLUSION

355

(2)

NOTES

357

(2)

INDEX

359

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