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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? ... - tailieumienphi.vn
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