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Lecture 19: Forwards & Futures
First Futures Market: Osaka
• Begun at Dojima, Osaka, Japan, in 1670s. World’s only futures market until 1860s.
• Dojima was center for rice trade, with 91 rice warehouses in 1673.
• Dojima futures exchange had precise definitions of quality, delivery date and place, experts who evaluated rice quality, and clearinghouses for contracts.
• Trading floor, daily resettlement, burning fuse, and watermen
Function of Osaka Futures Market
• Japan had sophisticated financial contracts before the futures market, partly under influence of Dutch.
• Rice bills and silver bills were kinds of forward contracts.
• Osaka market provided liquidity and price discovery for rice, allows merchants to hedge.
Issues for Rice Warehouser
• Warehousing itself is a stable business, little risk
• Great risk in fluctuation in rice price • Warehouser may seek to sell the rice
forward and lock in initial price. But, a forward contract is illiquid, difficult
Forward Contract
• Forward is just a contract to deliver at a future date (exercise date or maturity date) at a specified exercise price.
• Example: Rice farmer sells rice to warehouser. • Example: Foreign Exchange (FX) forward.
Contract to sell £ for ¥.
• Both sides are locked into the contract, no liquidity.
• What will warehouse think if rice farmer tries to get out of the contract?
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