Now in its sixth edition, Understanding Futures Markets by Robert Kolb (University of Colorado) and James Overdahl (Chief Economist of the Commodity Futures Trading Commission) provides the most comprehensive coverage of futures markets available. This new edition features updated and enhanced discussions on: event markets, proposition markets, weather futures, and macro futures globalization of futures markets electronic trading platforms and the rise of electronic trading manipulation of futures markets and methods of deterrence The Commodity Futures Modernization Act of 2000 and its effect on market regulation hedging in a corporate environment uses of futures by government entities energy futures products recent fiascos involving energy futures and related derivatives single stock futures products and narrow-based stock index futures accounting and taxation features of futures markets.Clearly written and accessible, this is the authoritative text for students and practitioners alike looking for an in-depth treatment of futures markets.

Robert W. Kolb is a Professor of Finance and Director of the Center for Business and Society at the University of Colorado. He is author and editor of over a dozen books and numerous articles on finance and investments. He devotes his time to writing and research, especially in the areas of futures markets, investments, and bond portfolio management. He was previously a Professor of Finance at the University of Florida, Emory University, and the University of Miami.

James A. Overdahl is Chief Economist at the Commodity Futures Trading Commission in Washington, D.C., and has held senior positions at the Risk Analysis Division at the Office of the Comptroller of the Currency and at the Securities and Exchange Commission. He has been an adjunct professor of business at Georgetown University, Virginia Polytechnic Institute, George Mason University, and Johns Hopkins University. Overdahl is co-author with Robert Kolb of Financial Derivatives 3e.

Preface

ix

Acknowledgments

xiii

List of Abbreviations

xv

Futures Markets: Introduction

1

(44)

Overview

1

(1)

Origins of Forward Contracting

1

(2)

Forward versus Futures Markets

3

(16)

Exchanges and Types of Futures

19

(5)

Purposes of Futures Markets

24

(3)

Regulation of Futures Markets

27

(5)

Commodity Futures Trading Commission (CFTC)

32

(2)

Recent Regulatory Initiatives

34

(3)

Taxation of Futures Trading

37

(2)

Conclusion

39

(1)

Questions and Problems

39

(1)

Notes

40

(5)

Futures Markets: Refinements

45

(48)

Overview

45

(1)

Margins: a Closer Look

46

(1)

Margins for Combinations of Futures Positions

46

(2)

Intermarket Cross-Margining

48

(1)

The Span Margin System

49

(1)

Value-at-Risk (VAR)

50

(2)

Exchange Competition

52

(4)

Contract Innovation and Contract Success

56

(3)

Brokers, Advisors, and Commodity Fund Managers

59

(5)

The Internationalization of Futures Markets

64

(2)

Electronic Futures Trading

66

(5)

Current Futures Industry Issues

71

(7)

Market Manipulation

78

(8)

Conclusion

86

(1)

Questions and Problems

86

(1)

Notes

87

(6)

Futures Prices

93

(54)

Overview

93

(1)

Reading Futures Prices

94

(6)

The Basis and Spreads

100

(6)

Models of Futures Prices

106

(20)

Futures Prices and Expectations

126

(2)

Futures Prices and Risk Aversion

128

(6)

Characteristics of Futures Prices

134

(7)

Conclusion

141

(2)

Questions and Problems

143

(1)

Notes

144

(3)

Using Futures Markets

147

(44)

Overview

147

(1)

Price Discovery

148

(5)

Speculation

153

(10)

Speculative Profits

163

(6)

Hedging

169

(14)

Conclusion

183

(1)

Questions and Problems

184

(1)

Notes

185

(6)

Agricultural, Energy, and Metallurgical Futures Contracts

191

(48)

Overview

191

(1)

Commodity Characteristics

191

(3)

Full Carry Markets -- Precious Metals

194

(5)

Commodities with Seasonal Production

199

(9)

Commodities with Seasonal Consumption

208

(1)

Commodities with Poor Storability

209

(2)

Bull and Bear Intercommodity Spreads

211

(2)

Inter-Commodity Spread Relationships

213

(8)

Feeder Cattle and Live Cattle

221

(4)

Hedging

225

(8)

Conclusion

233

(1)

Questions and Problems

234

(2)

Notes

236

(3)

A Bond Primer

239

(32)

Overview

239

(1)

Yield Concepts

239

(6)

Bond Price Changes

245

(4)

Convexity

249

(1)

The Term Structure of Interest Rates

250

(4)

Theories of the Term Structure

254

(6)

Bond Portfolio Maturity Strategies

260

(1)

Portfolio Immunization Techniques

261

(6)

Conclusion

267

(1)

Questions and Problems

267

(1)

Notes

268

(3)

Interest Rate Futures: Introduction

271

(40)

Overview

271

(4)

TIEE 28 Futures

275

(3)

Longer-Maturity Interest Rate Futures

278

(10)

Pricing Interest Rate Futures Contracts

288

(9)

Speculating with Interest Rate Futures

297

(4)

Hedging with Interest Rate Futures

301

(7)

Conclusion

308

(1)

Questions and Problems

308

(2)

Notes

310

(1)

Interest Rate Futures: Refinements

311

(58)

Overview

311

(1)

The T-Bond Futures Contract in Detail

311

(11)

Seller's Options in T-Bond Futures

322

(4)

Interest Rate Futures Market Efficiency

326

(7)

Applications: Eurodollar and T-Bill Futures

333

(28)

Long-Term Capital Management

361

(3)

Conclusion

364

(1)

Questions and Problems

365

(2)

Notes

367

(2)

Security Futures Products: Introduction

369

(30)

Overview

369

(1)

The Indexes

370

(4)

Stock Index Futures Contracts

374

(3)

Stock Index Futures Prices

377

(5)

Index Arbitrage and Program Trading

382

(5)

Speculating with Stock Index Futures

387

(3)

Single Stock Futures

390

(5)

Conclusion

395

(1)

Questions and Problems

395

(2)

Notes

397

(2)

Security Futures Products: Refinements

399

(34)

Overview

399

(1)

Stock Index Futures Prices

399

(5)

Real World Program Trading

404

(4)

Hedging with Stock Index Futures

408

(6)

Asset Allocation

414

(2)

Hedge Fund Uses of Stock Index Futures

416

(2)

Portfolio Insurance

418

(3)

Index Futures and Stock Market Volatility

421

(2)

Index Futures and Stock Market Crashes

423

(5)

Conclusion

428

(1)

Questions and Problems

428

(2)

Notes

430

(3)

Foreign Exchange Futures

433

(36)

Overview

433

(1)

Price Quotations

433

(3)

Geographical and Cross-Rate Arbitrage

436

(2)

Forward and Futures Market Characteristics

438

(4)

European Monetary Union

442

(1)

Determinants of Foreign Exchange Rates

442

(2)

Forward and Futures Prices for Foreign Exchange

444

(1)

More Futures Price Parity Relationships

445

(7)

Foreign Exchange Forecasting Accuracy

452

(2)

The Efficiency of Foreign Exchange Futures Markets

454

(1)

Speculation in Foreign Exchange Futures

455

(4)

Hedging with Foreign Exchange Futures

459

(4)

Conclusion

463

(1)

Questions and Problems

464

(3)

Notes

467

(2)

An Options Primer

469

(30)

Overview

469

(1)

Options and Options Markets

470

(3)

Option Pricing

473

(14)

The Option Pricing Model

487

(5)

Speculating with Options

492

(1)

Hedging with Options

493

(2)

Conclusion

495

(1)

Questions and Problems

496

(1)

Notes

496

(3)

Options on Futures

499

(32)

Overview

499

(1)

Characteristics of Options on Physicals and Options on Futures

499

(2)

The Market for Options on Futures

501

(1)

Pricing of Futures Options

501

(9)

Price Relationships Between Options on Physicals and Options on Futures

510

(3)

Summary

513

(1)

Put--Call Parity for Futures Options

514

(2)

Options on Futures and Synthetic Futures

516

(1)

Risk Management with Options on Futures

517

(9)

Summary

526

(1)

Why Futures Options?

526

(2)

Conclusion

528

(1)

Questions and Problems

529

(1)

Notes

530

(1)

Appendix A Core Principles for Futures Exchanges and Clearinghouses

531

(4)

Appendix B Summary of Accounting Rules for Derivative Instruments

535

(6)

Introduction

535

(1)

Instruments Covered by FAS 133

535

(1)

The Basic Accounting Strategy

536

(1)

Designation of a Derivatives Position as a Hedging Instrument

536

(1)

Recognized Types of Hedges

537

(2)

Accounting for Embedded Derivative Instruments

539

(1)

Special Provisions for Not-for-Profit Organizations

539

(1)

Disclosure Requirements

539

(1)

Summary

540

(1)

Appendix C Top 40 Futures Commission Merchants in the United States by Net Capital (6/30/2004)

541

(2)

Appendix D Cumulative Distribution Function for the Standard Normal Random Variable

543

(2)

Bibliography

545

(24)

Index

569

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