**Are you an EPFL student looking for a semester project?**

Work with us on data science and visualisation projects, and deploy your project as an app on top of GraphSearch.

Concept# Futures contract

Summary

In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.
Contracts are traded at futures exchanges, which act as a marketplace between buyers and sellers. The buyer of a contract is said to be the long position holder and the selling party is said to be the short position holder. As both parties risk their counter-party reneging if the price goes against them, the contract may involve both parties lodging as security a margin of the value of the contract with a mutually trust

Official source

This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.

Related publications

Loading

Related people

Loading

Related units

Loading

Related concepts

Loading

Related courses

Loading

Related lectures

Loading

Related publications (19)

Loading

Loading

Loading

Related people (2)

Related units (3)

Related concepts (71)

Derivative (finance)

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply calle

Futures exchange

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy

Hedge (finance)

A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, inc

Related courses (20)

FIN-416: Interest rate and credit risk models

This course gives an introduction to the modeling of interest rates and credit risk. Such models are used for the valuation of interest rate securities with and without credit risk, the management and hedging of bond portfolios and the valuation and usage of interest rate and credit derivatives.

FIN-404: Derivatives

The objective of this course is to provide a detailed coverage of the standard models for the valuation and hedging of derivatives products such as European options, American options, forward contracts, futures contract and exotic options.

FIN-413: Financial applications of blockchains and distributed ledgers

This course provides an introduction to distributed ledger technology, blockchains and cryptocurrencies, and their potential applications in finance and banking.

Related lectures (59)

I present a tractable framework, first developed in Trolle and Schwartz (2009), for pricing energy derivatives in the presence of unspanned stochastic volatility. Among the model features are i) a perfect fit to the initial futures term structure, ii) a fast and accurate Fourier-based pricing formula for European-style options on futures contracts, enabling efficient calibration to liquid plain-vanilla exchange-traded derivatives, and iii) the evolution of the futures curve being described in terms of a low-dimensional affine state vector, making the model ideally suited for pricing complex energy derivatives and real options by simulation. I also consider an extension of the framework that takes jumps in spot prices into account.

In the first chapter,which is a joint work with Mathieu Cambou and Philippe H.A. Charmoy, we study the distribution of the hedging errors of a European call option for the delta and variance-minimizing strategies. Considering the setting proposed by Heston (1993), we assess the error distribution by computing its moments under the real-world probability measure. It turns out that one is better off implementing either a delta hedging or a variance-minimizing strategy, depending on the strike and maturity of the option under consideration. In the second paper, which is a joint work with Damir Filipovic and Loriano Mancini, we develop a practicable continuous-time dynamic arbitrage-free model for the pricing of European contingent claims. Using the framework introduced by Carmona and Nadtochiy (2011, 2012), the stock price is modeled as a semi-martingale process and, at each time t , the marginal distribution of the European option prices is coded by an auxiliary process that starts at t and follows an exponential additive process. The jump intensity that characterizes these auxiliary processes is then set in motion by means of stochastic dynamics of Itô's type. The model is a modification of the one proposed by Carmona and Nadtochiy, as only finitely many jump sizes are assumed. This crucial assumption implies that the jump intensities are taken values in only a finitedimensional space. In this setup, explicit necessary and sufficient consistency conditions that guarantee the absence of arbitrage are provided. A practicable dynamic model verifying them is proposed and estimated, using options on the S&P 500. Finally, the hedging of variance swap contracts is considered. It is shown that under certain conditions, a variance-minimizing hedging portfolio gives lower hedging errors on average, compared to a model-free hedging strategy. In the third and last chapter, which is a joint work with Rémy Praz, we concentrate on the commodity markets and try to understand the impact of financiers on the hedging decisions. We look at the changes in the spot price, variance, production and hedging choices of both producers and financiers, when the mass of financiers in the economy increases. We develop an equilibrium model of commodity spot and futures markets in which commodity production, consumption, and speculation are endogenously determined. Financiers facilitate hedging by the commodity suppliers. The entry of new financiers thus increases the supply of the commodity and decreases the expected spot prices, to the benefits of the end-users. However, this entry may be detrimental to the producers, as they do not internalize the price reduction due to greater aggregate supply. In the presence of asymmetric information, speculation on the futures market serves as a learning device. The futures price and open interest reveal different pieces of private information regarding the supply and demand side of the spot market, respectively. When the accuracy of private information is low, the entry of new financiers makes both production and spot prices more volatile. The entry of new financiers typically increases the correlation between financial and commodity markets.

Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasi-analytical prices of options on futures contracts, and dynamics of the futures curve in terms of a low-dimensional affine state vector. We estimate the model on NYMEX crude oil derivatives using an extensive panel data set of 45,517 futures prices and 233,104 option prices, spanning 4082 business days.We find strong evidence for two predominantly unspanned volatility factors.