3. Forward and futures prices Summary Short selling The repo rate Forward Contracts Forward Price vs, Futures price Stock index Futures Forward and futures contracts on currencies Charles cao
1 Charles Cao 3. Forward and Futures Prices ◼ Summary ◼ Short Selling ◼ The Repo Rate ◼ Forward Contracts ◼ Forward Price vs. Futures Price ◼ Stock Index Futures ◼ Forward and Futures Contracts on Currencies
Short Selling Selling securities that you do not own and buying them back later Yield a profit if the price of a security goes down Yield a loss if the price of a security goes up a Real world application Charles cao 2
2 Charles Cao Short Selling ◼ Selling securities that you do not own and buying them back later ◼ Yield a profit if the price of a security goes down ◼ Yield a loss if the price of a security goes up ◼ Real world application
Short Selling: Example You call your broker and instruct him to short 100 shares of att He will borrow 100 shares of att from another client Sell them in the open market at $50 per share Deposit the cash in your account Charles cao 3
3 Charles Cao Short Selling: Example ◼ You call your broker and instruct him to short 100 shares of ATT ◼ He will borrow 100 shares of ATT from another client ◼ Sell them in the open market at $50 per share ◼ Deposit the cash in your account
Short Selling: Example a You instruct your broker to close out the position 10 days later. He will buy 100 shares of att and return them to the client If the price is $48 the profit is $200 If the price is $51, the loss is $100 Charles cao
4 Charles Cao Short Selling: Example ◼ You instruct your broker to close out the position 10 days later. He will buy 100 shares of ATT, and return them to the client ◼ If the price is $48, the profit is $200 ◼ If the price is $51, the loss is $100
Short Selling Shares can only be sold on an uptick (price increases) a Margin requirement Some brokers pay interest on margin accounts Dividends and interest received by the investor will be transferred to the client from whom the shares were borrowed Charles cao
5 Charles Cao Short Selling ◼ Shares can only be sold on an uptick (price increases) ◼ Margin requirement ◼ Some brokers pay interest on margin accounts ◼ Dividends and interest received by the investor will be transferred to the client from whom the shares were borrowed