FRE 501 2013Lab 1

Intro to Futures Markets

Agenda

• Terminology• Why Futures• Global Exchanges

Some Terminology (‘Lingo’)Futures are securities and also derivatives

Securities: in essence assets that are– fungible (inter-changeable)– tradeable

(pencil example if necessary)

Derivatives: instruments that derive their value from the price of some other underlying entity

• Futures differ from stocks/bonds• Stocks/Bonds transfer capital• Futures transfer price risk

Why Learn about Futures at AllMarkets are fundamental to economics; efficient prices are key to maximizing social welfare

Price Discovery:Futures Markets where they exist, determine the ‘correct’ prices for commodities (for better or worse) – all participants base their decisions on the clearing prices

Wrong PricesWrong prices lead to suboptimal human behaviour – deforestation, overfishing, overcultivation, overconsumption, over-construction (houses in US,Iceland, Spain, etc, New South China Mall in China)

We excel at killing the only planet we haveNearest possible alternative exoplanet is 12 light-years away, about 142,000 years with current technology

Important for EveryoneCorporate Careers Government Careers Consultative WorkUp or Downstream(Producer or Processor)

Policy Makers Non-profit Organizations

IntermediariesTrading Companies

Financial Institutions

Regulatory and Supervisory Roles

Economic Think Tanks

Stay-home speculators (social parasites)

Battling immoral opportunistswhether banks/corporates/individuals

知 己 知 彼百 战 百 胜Know yourself, Know your opponent

A hundred battles, a hundred victories – Sun Tzu

Weapons by themselves are neutralUse the enemy’s weapons against themBattle of Red Cliff – straw boats/arrows

Distortions in the Futures Markets

Read the testimonials of Michael Masters , an honest Hedge Fund Manager who fought for better markets:• 2008: To the Committee on Homeland Security and

Governmental Affairs, US Senate• 2009: To the CFTC

Exchanges: Americas

Exchanges: Europe

Exchanges: Asia

Global Derivatives (by # contracts)

Derivatives Exchanges and Products

• Directory Listing at Mondo Visione’s Website• Also, check out the World Federation of

Exchanges website. Their IOMA 2012 survey gives global statistics on derivatives trading worldwide