1. The Derivatives HEDGING WITH FUTURES SKOOL COMPUTER EDUCATION

11. IMM 3-MONTH EURODOLLAR FUTURES CONTRACT EXAMPLE OF FUTURES CONTRACT STANDARDIZED TERMS Cash settled Delivery: The second London bank business day immediately preceding the third Wednesday of the contract month Last trading day: 7:20 a.m. – 2:00 p.m. (Chicago time), Mon. – Fri, except on the last trading day of an expiration contract, when trading closes at 9:30 a.m. (3:30 p.m. London time). The contract also trades on the Globex  system Trading Hours: March, June, September, December; Serial Months, Spot Month Contract Months No limit Daily Price Limit: Eurodollar time deposit having a principal of $1 million with a 3-month maturity Trading Unit:

12. HENRY HUB NATURE GAS FUTURES EXAMPLE OF FUTURES CONTRACT STANDARDIZED TERMS Pipeline specifications in effect at the time of deliver Quality Specifications No earlier than the first calendar day of the delivery month and must be completed no later than the last calendar day of the delivery month. Delivery Period: Sabine Pipe Line Co.’s Henry Hub in LA. Seller is responsible for movement of gas through the Hub; the buyer from the Hub. Hub fee paid by the seller. Delivery Three business days prior to the first calendar month day of the delivery month Last trading day: 10:00 a.m. – 3:10 p.m. (NY time), Mon. – Fri, for any open outcry session. After-hours trading is conducted via NYMEX ACCESS  electronic trading system from 4:00 – 7:00 p.m., Monday through Thursday Trading Hours: 36 consecutive months commencing with the next calendar month Contract Months $1.50 per MMBtu ($15,000 per contract) for first 2 months. Initial back month limits of $0.15 per MMBtu rise to $0.3 per MMBtu if the previous day’s settlement price in any back month is at $0.15 limit Daily Price Limit: Dollars and cents per MMBtu Price Quotation: 10,000 million British Thermal Units (MMBtu) Trading Unit:

25. DAILY MARK-TO-MARKET EXAMPLE

26. A POSSIBLE OUTCOME Daily Cumulative Margin Futures Gain Gain Account Margin Price (Loss) (Loss) Balance Call Day (US$) (US$) (US$) (US$) (US$) 400.00 4,000 5-Jun 397.00 (600) (600) 3,400 0 . . . . . . . . . . . . . . . . . . 13-Jun 393.30 (420) (1,340) 2,660 1,340 . . . . . . . . . . . . . . . . . 19-Jun 387.00 (1,140) (2,600) 2,740 1,260 . . . . . . . . . . . . . . . . . . 26-Jun 392.30 260 (1,540) 5,060 0 + = 4,000 3,000 + = 4,000 <

42. OPTIMAL HEDGE RATIO Proportion of the exposure that should optimally be hedged is where  S is the standard deviation of  S , the change in the spot price during the hedging period,  F is the standard deviation of  F , the change in the futures price during the hedging period  is the coefficient of correlation between  S and  F .

47. ROLLING THE HEDGE Another Possibility

48. ROLLING THE HEDGE Another Possibility