Dakota State University
BUS 418 Financial Futures & Options
Spring 2001
Reading Assignments
Trading Futures: Class notes Chapter 5: Pp. 112-118, 134-138 Chapter 6: Pp. 148-149, 169-172 Chapter 7: Pp. 198-206, 211-213 Chapter 8: Pp. 220-224, 237, 243-247 Chapter 9: Pp. 251-256, 258-261, 266, 269-272 Precious Metals Futures: Class notes
Question & Problem Assignments
Trading Futures: none Chapter 5: 9 Chapter 6: None Chapter 7: None Chapter 8: None Chapter 9: 1 Precious Metals Futures: none
Objectives
Trading Futures: The Mechanics of Futures Trading
1. Give the general procedure for opening an account with a futures
broker, including documents and information needed.
2. Describe how a trading order is placed, either by telephone or
online, and executed.
3. Define or describe the following types of orders:
a) day
b) good til canceled, GTC
c) market
d) limit
e) stop
f) closing
g) market if touched, MIT
h) fill or kill, FOK
i) one cancels other, OCO
j) contingent
k) spread
4. State the typical commissions for full service, discount, and
online brokers.
* 5. Explain in precise and complete detail what is meant by daily
settlement (marking to market), including discussion of:
a) initial margin
b) maintenance margin
c) nature of margin (as opposed to margins in stock trading)
d) the degree of leverage and risk imparted to futures trading
because of the size of the margin relative to the value of
the underlying asset
e) settlement price (as opposed to last price)
f) margin calls
g) potential loss relative to size of margin and account equity
h) what actually happens to the accounts at the end of the day in
terms of cash flow
Trading Futures: Who Wins? Who Loses? And Why?
6. State the profit or loss experience of most futures traders
(speculators).
7. Give some reasons why traders, especially small traders, will
trade futures anyway.
8. Give some standard advice on futures trading with regard to:
a) where to put all your eggs
b) patience
c) buying or selling after a big, long decline
d) speculating for a specific purpose, like a new car
e) relative correctness of markets vs. opionions
f) how right the public is
g) contrarian approach
h) bulls, bears, and pigs
i) meeting margin calls
j) need to be in the market
k) what to do when in doubt
l) what the sleeping point is
m) risk capital
n) knowing yourself
o) the crowd
p) size of initial equity
q) commitment of equity to margin
r) which month to trade and why
s) market orders
t) how many contracts to trade
u) how to put on a large position
v) what to do about profits
w) what to do about losses
x) stop orders
y) contract maturity
z) picking tops and bottoms
aa) rumors and facts
bb) windfall profits
cc) advisability of selling short
dd) preference for going long or short
ee) trading plan
ff) importance of news
gg) cockiness
hh) greed
ii) size of position relative to capital
jj) frequency of trading
kk) day trading
ll) scalping for off-floor traders
mm) defining risk
nn) adding to a losing position
oo) emotion
pp) level of financing
qq) number of positions to hold simultaneously
rr) what to do about inactive markets and why
ss) trading markets and trending markets
tt) discipline in trading
uu) trading against the trend
vv) diversification
ww) ego
xx) expectations of losses
yy) research
zz) bandwagons
aaa) overleverage
bbb) trading out of character
ccc) a sure way to make a small fortune in futures
ddd) taking risks
eee) inevitability of losses
fff) specialization
ggg) trading pyramids
hhh) trading contracts during the month of expiration
iii) admitting mistakes
jjj) low reward/risk ratio positions
kkk) your psychological makeup
lll) protecting losing outright positions with spreads
* 9. Explain what a stop order is and when it is usually used.
10. Explain what a market-if-touched order is and when it is usually
used.
11. Explain the difference between stop orders and market-if-touched
orders in terms of relative prices and rationale for using them.
12. Give several reasons for using stop orders.
13. Explain what could happen if you don't use stop orders.
14. Describe several ways of determining the stop prices to use.
15. Describe several pitfalls when using stops with regard to:
a) getting whipsawed
b) fast moving markets
c) gaps at the open
d) commission costs
e) pit trading tactics
16. State a particularly frustrating experience when using stops.
Trading Futures: The Game Plan and Money Management
17. State:
a) whether you should have a plan for trading futures or not
b) whether successful trades should expect every trade to be
profitable
c) what can prevail in the short run
d) what will prevail in the long run
e) why there must be losers in the futures markets
18. State the four key elements of a futures game plan.
19. State the usual priority of three common objectives of trading
futures.
*20. State a wise assumption about the relative sizes of your trading
opponent (the market) and you and the consequent influence on
your trading strategy.
21. State the correlation between the proportion of your capital
committed to each trade and the probability of ruin.
22. State the correlation between the size of your initial capital and
your chance of success in trading futures.
23. State practical reasons why having lots of money will help you
survive longer in terms of:
a) stops
b) proportion of capital at risk
c) staying in the game
24. State some decisions to be made when choosing a method of trade
selection and evaluation.
25. State some desirable characteristics of a trade selection system.
26. State when exit strategies should be designed relative to
establishing a futures position (making an initial trade) and why
this is important.
27. State some possible exit strategies.
Trading Futures: General Sources of Information
28. Explain what is meant by fundamental analysis as opposed to
technical analysis.
29. State what fundamentalist traders study to make trading decisions.
30. State what technicians (technical analysts) study to make trading
decisions.
31. State a common combined approach of making trading decisions.
32. Describe the three forms of the efficient market hypothesis, weak,
semi-strong, and strong.
33 State the academic statistical evaluations of the three forms of the
efficient market hypothesis.
34. State how much fundamental data exists.
35. Relate the trader's forecast to the market's forecast and why this
is important.
36. State whether computers have made the markets more efficient or
not.
37. State the difference between a descriptive model and a forecasting
model and state what each type of model helps you do.
38. Explain what is meant by back testing a model.
39. State several sources of fundamental data.
40. Given a line of quotations from the Wall Street Journal for any
futures contract, explain what each item in the line means.
41. Calculate the value of one tick for a real or hypothetical futures
contract.
Trading Futures: Technical Analysis
42. State several criticisms made by technicians of fundamental
analysis.
43. State several criticisms made by fundamentalists of technical
analysis.
44. Describe the theory of technical analysis including supply and
demand, market forces, prices, trends, changes in trends, charts,
and chart patterns.
*45. State several characteristics of technical analysis including:
a) data used
b) use of timing
c) investment time horizon
d) assumption about the rate of the market's assimilation of new
information into prices
46. Describe the following types of charts, including an appropriate
example:
a) line
b) bar (I-bar, I-beam)
c) candlestick
d) moving average
47. Explain, illustrate, or identify trends in charts.
48. Describe the following types of chart patterns, with a diagram:
a) head and shoulders
b) triangles
c) gaps
d) saucers
e) breakouts
f) trendlines
g) channels
49. Describe the use of two moving averages to generate buy and sell
signals.
50. Explain why the open interest for a distant contract may suddenly
increase dramatically as a normal pattern and not be interpreted
as a sudden change in the underlying fundamentals.
51. Explain what is meant by the following technical trading terms:
a) backtesting
b) drawdown
c) overbought
d) oversold
e) support
f) resistance
52. State several advantages to using a mechanical trading system.
53. Explain what is meant by the following trading systems:
a) trend following
b) pattern recognition
54. Describe the following problems in trend-following trading systems:
a) getting whipsawed
b) lack of sensitivity
c) trading-range market losses
d) paper versus real trading
*55. Given a chart of futures prices, use technical analysis to make a
forecast of the future futures price level, drawing on the chart
itself the patterns and trends seen and adding commentary
demonstrating familiarity with technical analysis terminology and
jargon.
56. Explain why it is useful to study technical analysis, especially in
the futures markets, even if you do not accept the validity of
technical analysis.
Trading Futures: Spreads
57. Explain what a spread trade is.
58. State the aspect of prices that spreaders are interested in.
59. State:
a) the biggest reason for trading spreads instead of outright
positions
b) margins for spreads versus outright positions
b) the kind of correlation between contracts needed for spreading
the contracts
60. Define and give examples of the following types of spreads:
a) intramarket
b) intercommodity
61. Define the following spread terms:
a) legs
b) legging in or legging out
c) a bull spread
d) a bear spread
62. Discuss the following types of spread mistakes:
a) legging in mistakes
b) legging out mistakes
c) position size
63. State several practical problems in trading spreads.
64. State several cautions to be followed when trading spreads with
regard to:
a) risk of spreads
b) amount of trading
c) liquidity of legs
d) liquidating legs
e) prices of legs
65. Discuss the following general considerations in spreading interest
rate contracts:
a) why T-bill and Eurodollar futures prices change
b) the relative rate of change of contracts of different months
c) the usual correlation between the level of interest rates and
the price difference between different month contracts
d) the usual correlation between the difference in time between
two contracts and the difference in price
e) the usual correlation between the difference in time between
two contracts and the volatility of the spread
66. State the basic spread strategy for T-bill and Eurodollar futures
including:
a) how the futures prices are determined from expected interest
rates
b) what spread to establish if interest rates are expected to
rise
c) what spread to establish if interest rates are expected to
fall
*67. For Eurodollar spreads discuss:
a) the theory behind Eurodollar spreads
b) an example of a Eurodollar spread
c) the price behavior of the Eurodollar futures price as interest
rates are expected to rise or fall
d) the expected behavior of the spread as interest rates are
expected to rise or fall
68. Explain what "TED" in "TED spread" stands for.
69. Describe a TED spread, especially in contrast to a T-bill or a
Eurodollar spread.
Chapter 5: Interest Rate Futures: Introduction Chapter 6: Interest Rate Futures: Refinements
70. Define a basis point as used in interest rates.
71. Given quotations from the Wall Street Journal for T-bond futures,
T-bill futures, or Eurodollar futures, explain what each item in
the quotations means.
72. State to which end of the yield curve each of the three instruments
in #1 apply.
73. For U.S. Treasury bond futures state:
a) size of contract
b) how futures price is quoted
c) minimum tick size
d) value of one tick in dollars
e) whether the T-bond futures price will rise or fall if
interest rates are expected to rise or fall
f) hypothetical instrument used by financial publications to
calculate yield implied by futures price
*74. For Eurodollar futures state:
a) size of contract and underlying asset
b) how futures price is quoted
c) minimum tick size
d) value of one tick in dollars
e) daily limits
f) how the contract is settled
g) approximate initial margin required per contract
75. For speculating in Eurodollar futures state
a) whether to buy or sell the contract if you expect interest
rates to go up or down
b) why simply forecasting whether interest rates will go up or
down is not sufficient when trying to decide whether to buy
or sell the interest rate futures
Chapter 7: Stock Index Futures: Introduction Chapter 8: Stock Index Futures: Refinements
76. For stocks state: a) the level to which portfolio risk can be reduced by diversification b) how the risk level of a portfolio can be reduced even further 77. Given quotations from the Wall Street Journal for various stock index futures, explain what each item in the quotations means. 78. For the Dow Jones Industrial Average futures contract state: a) the underlying asset b) the size of the contract c) the minimum tick size d) the value of one tick in dollars e) how the contract is settled *79. For the S&P 500 Index futures contract state: a) the underlying asset b) the size of the contract c) the minimum tick size d) the value of one tick in dollars e) how the contract is settled f) approximate initial margin required per contract 80. Explain who Nick Leeson is. (p. 213)
Chapter 9: Foreign Exchange Futures
81. Explain why currency futures were created in the early 1970s.
82. Describe briefly the market for currencies themselves.
83. Describe the following theories of factors affecting exchange
rates:
a) purchasing power parity
b) balance of payments
c) asset market approach
84. Given quotations from the Wall Street Journal for various currency
futures, explain what each item in the quotations means.
*85. For the Japanese yen futures contract state:
a) the size of the contract
b) the units the prices are quoted in
c) the minimum tick size (dollars per yen)
d) the value of one tick in dollars
e) how the contract is settled
f) whether a rise (of fall) in the futures price represents a
strengthening or weakening of the dollar relative to the yen
Supplement: Precious Metals Futures
86. Explain how gold and the stock markets have frequently been
related.
87. State the supply of gold relative to the annual production and the
impact this has on price determinants.
88. Given quotations from the Wall Street Journal for gold futures,
explain what each item in the quotations means.
*89. For the gold futures contract state:
a) the size of the contract (COMEX division)
b) units the prices are quoted in
c) the minimum tick size (dollars per ounce)
d) the value of one tick in dollars
e) how the contract is settled
[Unit Two Study Guide in Word format]
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Last update: March 20, 2001