Forward and Futures

1. Forward and Futures
Adler Haymans Manurung
Guru Besar Pasar Modal dan Perbankan
FE Universitas Bina Nusantara
Advisor PT Bursa Berjangka Jakarta

2. DERIVATIF
• Forwards – Commodity, Currency, and
Stocks
• Future - Commodity, Currency, and Stocks
dan Interest Rate
• Option – Stocks and Currency
• Swap – Currency and Interest Rate

3. Futures
• Hull (1997) mendefinisikan Futures:
“An agreement between two parties to buy or sell an asset
at a certain time in the future for a certain price”
• CBOT (2006) mendefinisikan Futures:
“A legally binding agreement to buy or sell a commodity or
financial instrument some time in the future at a price
agreed upon at the time of the trade”

4. Sejarah Futures
• Midwestern – 1800 ----- Forward
• Standardisasi 1865 - Futures
• CBOT – 1848
– Berkumpul 82 pedagang
• New York Mercantile Exchange, 1872
• Government US established CME 1919

5. Forwards
• Contract between two parties at specific
on certain date
• Non Bourse – Non regulated
• Delivery System – depend on contract

6. Futures
• Contract between two parties at specific
on certain date
• Bourse – Regulated
• Clearing Settlement

7. Forwards Futures
Transaksi antar dua
pihak dapat melalui
Bank
Transaksi dilakukan di
dalam bursa
Fleksibel dan sesuai
perjanjian
Sangat distandardisasi
Risiko pihak ketiga Ada Clearinghouse
(lembaga kliring)
Ada penyelesaian tunai
dan diserahkan
Marking to market
Undang – Undang /
Hukum Perdata
Ada regulasi yang harus
diikuti

8. Futures vs Forward
• Dubofsky (1992) menyatakan bahwa perbedaan
Futures dan forward, yaitu:
– Futures contract are standardized: only the price is negotiated.
– Futures contracts are usually more liquid than forward contracts,
in part because they are standardized.
– Once a futures price has been agreed upon and a trade
completed, the exchange’s clearinghouse becomes the opposite
party to both the buyer and the seller.
– Most futures positions are eventually offset.
– Perhaps the most important differences, at least for pricing
purposes, involve security deposits (margin) and the timing of
cash flows (daily resettlement, or marking to market).

9. Exchanges and Year Founded
Principal Type of Contracts
Physical Currencies
Interest
Rates
Index
Chicago Board of Trade (CBT), 1848   
Chicago Mercantile Exchange (CME), 1919
   
Coffee, Sugar and Cocoa Exchange (New York), 1882
 
Commodity Exchange, Inc. (COMEX) (New York), 1933

Kansas City Board of Trade (KCBT), 1856
 
Mid-America Commodity Exchange (Chicago), 1880
  
Minneapolis Grain Exchange, 1881 
New York Cotton Exchange, Inc 1870   
Citrus Associates of the New York Cotton Exchange,
1966 
Petroleum Associates of the New York Cotton
Exchange, 1971 
New York Futures Exchange (NYFE), 1979

New York Mercantile Exchange, 1872 
Chicago Rice and Cotton Exchange 

10. Exchanges
Principal Types of Contracts
Physical Currencies Interest Rates
Stock
Index
Bolsa de Mercadorios de Sao Paulo
   
London International Financial Futures Exchanges (LIFFE)
  
Baltic International Freight Futures Exchange (BIFFEX)
(London)

International Petroleum Exchange (London)

London Futures & Options Exchange (FOX)

Tokyo International Financial Futures Exchange
  
Osaka Securities Exchange 
Tokyo Commodity Exchange 
Tokyo Stock Exchange  
Singapore International Monetary Exchange (SIMEX)
   
Marche a Terme International de France
  
Hong Kong Futures Exchange  
New Zealand Futures Exchange   
Sydney Futures Exchange    
Toronto Futures Exchange   
Montreal Exchange 
Winnepeg Commodity Exchange 
Thailand Futures Exchange   
Kualalumpur Commodity Exchange

Tabel 2: Non-US Futures Exchanges

11. Australian British Canadian Deutsche French Japanese Swiss
Dollar A$ Pund Dollar Mark Franc Yen Franc
Contract Size 100,000 62,500 100,000 125,000 500,000 12,500,000 125,000
Symbol AD BP CD DM FR JY SF
Margin Requirements
Intial in $ 1,148 1,485 608 1,755 1,755 4,590 2,565
Maintenance ($) 850 1,100 450 1,300 1,300 3,400 1,900
Minimum Price 0.0001 0.0002 0.0001 0.0001 0.00002 0.000001 0.0001
Change (1 pt.) (2 pts.) (1 pt.) (1 pt.) (2 pts.) (1 pt.) (1 pt.)
Value of 1 point ($) 10.00 6.20 10.00 12.50 10.00 12.50 12.50
Months Traded
Trading Hours
Last Day of Trading
Sumber: Alan Shapiro, Multinational Financial Management; 5th eds., Prentice Hall International, Singapore
January, March, April, June, July, September, October, December, and Spot Month
7:20 A.M - 2:00 P.M. (Central Time)
The Second Business day immediately preceding the third Wednesday of the delivery month
Tabel 1: Contract Specificatin for Foreign Currency Futures

12. Bank Indonesia @ 2006
Market Participants
Hedgers
• Hedging is the opposite of speculation and describes the process
of managing the price risk inherent in a business by offsetting
that risk in the futures and options market. It can vary in
complexity from a relatively simple activity through to a highly
complex operation.
• Managing price risk means:
maintaining greater control of the cost of inputs or revenues
from sales, or both planning for the future based on assured
costs and revenues
• Eliminating concerns that a sharply adverse move in a metal's
price could turn an otherwise flourishing and efficient business into
a loss maker

13. • Example
A copper mining firm may sell copper futures to fix a sale
price today for future copper production. By selling the
futures, the firm protects profit margins and sales
revenues against a potential decline in the copper price
thus offsetting the price risk in the futures market.
• Mutually compensatory movements in his cash and
futures holdings should have cancelled out any change
of price that occurred during the interval. If the grain
price has dropped, the operator buys back the futures
contract at less than the sale price, and the profit from
doing so will be offset by the loss on the grain.
Market Participants
Bank Indonesia @ 2006

14. Bank Indonesia @ 2006
Market Participants
SPECULATORS
 Speculators buy and sell futures and options contracts in an
effort to profit from price trends.
 If speculators believe that prices will rise, they buy futures
contracts. If prices do indeed rise, the speculator profits by
selling the contract at the higher price. If prices fall, the
speculator stands to make a loss.
 Typically, speculators have no desire to actually own the
physical commodity. They assume market price risk and
add liquidity and capital to the futures markets.

15. Types of Traders
• Commission Brokers – are following the
instructions from their clients and charge a
commission for doing so
• Locals – are trading for their own account
• Types of Speculators:
– Scalpers – attempt to profit for small changes in
contract price (hold position only for minutes)
– Day Traders – hold their position for less than one
trading day
– Position Traders – hold positions for much longer
period of time

16. Bank Indonesia @ 2006
Market Participants
ARBITRAGEURS
• Arbitrage is the process of simultaneously buying and selling a
product in related markets to earn a risk-free profit.
• Arbitrageurs bridge the gap between the cash and futures market, by
maintaining the price relationship between the underlying physical
commodity and its futures market.
• Arbitrage in commodity futures markets takes the form of cash and
carry arbitrage.
• This exploits a situation where the price of a particular future is higher
than the spot price of the underlying commodity plus the costs of holding
the commodity until delivery, i.e, storage, insurance, interest costs, etc.
In this case, cash and carry arbitrage involves purchasing the underlying
physical commodity and simultaneously selling its corresponding futures
contract.

17. Bank Indonesia @ 2006
Market Participants
Arbitrage between the commodity spot and futures
markets is not as common as in financial markets
because of the burden of the purchasing and delivering
the underlying commodity.
Example
A dealer's cost for storing wheat is 10 cents per bushel. This
covers transportation, security, insurance, interest costs, etc. The
dealer notices that the price of wheat futures expiring in two
months time is 21 cents above the spot price. The dealer sells
wheat futures and purchases an equivalent amount of physical
wheat, which is then stored.
When the futures contract expires two months later, the dealer
delivers the wheat in fulfillment of the short futures position and
earns an arbitrage profit of 11 cents (21 cents less 10 cents) per
bushel.

18. Bank Indonesia @ 2006
Market Participants
The Hedgers pass off the risk of
price variation to the
Speculators, who is better able,
or at least more willing to bear
the risk
Hedgers Speculators
Risk

19. Keynes & Hicks
• Hedgers tend to hold short positions and traders
used to hold long positions
• The futures price of an asset will be below its
expected future spot price – normal
backwardation
• Note:
– Because speculators require compensation for the
risk they are bearing – to make money on average
– Hedgers tend to loose money on average but it is
aligned with the hedging purpose to enter futures
– If the other way around – expected future spot price is
lower than Futures price - contango

20. Hubungan Short and Long

21. Basis

22. Market Mechanics

23. Financial Futures Specific
Features
• Traded in Specific Exchanges (IMM, LIFFE etc.)
• Commission
• Specific periods / Settlement Dates
• Standardized amounts for each contract
• “Open Cry” trading in the Exchanges
• Guaranteed by the “Clearing House”
• Settled-Up or Marked to Market
• Initial and variable Margins
• Net-out-basis
• Provides Opportunities to Trade, Speculate, & Hedge
• Exchange provides Liquidity

24. Commission
A certain pre-defined amount of fee paid by
a buyer or seller for a round trip transactions
of initiating and closing a contract
Amount varies based on type of the
underlying instrument,i.e. the commission
charge is approximately USD30 per
currency futures contract
Relatively lower cost/commission imposed in
futures contract reducing the cost of hedging

25. Specific Maturity Dates
Standardized Settlement Dates –
Not Customized
March, June, September,
December of the year

26. Standardized Amount
Standardized Contract Amount – Not
Customized (Exchange Traded Vs
OTC)
Position in multiple contracts might be
necessary to establish a hedge

27. Open Cry
Client
Broker
Exchange Floor
Trading Pit
Brokers & Traders
Negotiated
by Open
Outcry

28. Trading Flow

29. Clearing House
 Serves as a the third party to all
transactions
 Active secondary market trading
 No assessment of creditworthiness –
because it reduce the possibility of default to
zero, by the initial margin blocking and daily
MTM process.

30. Mark to Market
• Realization of profit or loss on a day to day
basis
• Contract Rate Vs End of Day (Closing)
Rate (multiplied by respective notional)
• Profit/Loss will be added/subtracted from
the initial margin deposited
• If initial margin minus accumulated loss <
maintenance margin (75% of initial margin)
– top up/liquidation

31. Initial & Variable Margin
• 4%-10% of contract value – Initial
Margin – amount of funds pledged for
holding a position
• Notional of Variable Margin will vary
depends on the MTM profit/loss
added/subtracted daily from your
account
• Enable Investor/Hedger to enter the
whole contract amount by depositing
significantly smaller margin (Leverage)

32. Net Out Basis
• More than 90% of Futures
Contracts are closed out before
Settlement Date (standardized/un-
customized tenor)
• Without the necessity of delivery
(no real position in underlying
assets)

33. Long & Short
Position

34. Long Vs Short
A buyer of futures contract (one who holds long
position) in which the settlement price is higher
(lower) than the previous day’s settlement price has
a positive (negative) settlement for the day.
Since a long position entitles the owner to purchase
the underlying asset, a higher (lower) settlement
price means the futures price of the underlying
asset has increased (decreased). Consequently a
long position in the contract is worth more (less).

35. Long Vs Short
Futures trading between the long
and short is a zero sum game;
that is the sum of the long’s and
short’s daily settlement is zero.

36. Long Vs Short
Futures trading allows Investor to do a
“short selling” (you can sell first even if you
do not have the underlying)
Regulators in US at the moment allow a
stock to be shorted only on an uptick – that
is when the most recent movement in the
price of the stock was an increase

37. Transaction Mechanism
Open
BUY
Close
SELL
Open
SELL
Close
BUY
Buy Low Sell High
Two Ways Opportunity
Bullish
Strategy
Bearish
Strategy

38. Pricing of Financial Futures
(example: Currency)
 Forward price is an unbiased predictor of spot
exchange rate in the future (so does Futures)
 Futures are priced very similarly to Forward
contracts
 Based on Interest Rate Parity Theory (High
Interest Rate Currency will appreciate against Low
Interest Rate Currency)
 Ft ($/i) = So ($/i) [(1+Rus)/(1+Ri)] t
Ft = Futures Price, So = Spot Price, Rus = I/R
USD, Ri = I/R Currency i

39. Financial Futures: Interest Rates
90 Days Eurodollar Contract Specifications
Unit of Trading
Contract Months
Last Trading Day
Quotation
Value of 1 pt
Tick Size
Tick Value
Current Price
Pt Value x Price
Final Settlement
$ 1,000,000 (hypothetical $1,000,000, 90 day deposit of
Eurodollar
March, June, September, December
11 AM London time on the second London bank business day
immediately preceding the third Wednesday of the contract
month
100 minus interest rate
$2,500
0.01
$25
98.375 (100 – Yield)
$ 245,937.50
Based on BBA Interest Settlement Rate

40. Financial Futures: Interest Rates
FUTURES
INTEREST RATES Vs PRICE
• INTEREST FUTURE
• RATES PRICES
• 10% 94
• 9% 93
• 8% 92
• 7% 91
• 6% 90

41. Financial Futures: Example
 In June Treasurer of PT ABC knows he will need
a 3 months $1mio loan on 21st June 2006
 He will be paying 3M LIBOR + 1.00%
 A 1% rise in rates generates an extra $2,500 in
interest expense
 How can he use financial futures to hedge his
position?

42. Financial Futures: Example
 The Treasurer sells one Eurodollar contract. On
that date, the contract is priced at 98.35 (100 –
1.65), with 1.65% being the implied 3 months
Eurodollar for that period
 On the 21st June, the 3 months rate is 2.50%,
giving the contract a price of 97.50
 The Treasurer has made 98.35 – 97.50 = 85 ticks
 Price movement per tick = $25
 Profit = 85 x $25 = $ 2,125

43. Forward-Futures Prices
• Spot Price, S.
• Forward/Futures Price, F.
• Interest for the period er*t dimana t
setahun
• F = S * er*t
• Contoh: Misalkan harga currency US $
1 = Rp. 9.300,- SBI rate 7,5% p.a.
Forwad price untuk 3 bulan ke depan:
– F = 9300*e7.5*0.25 = 9.476,02

44. Long Forward Contract
Prices
• Spot Price, S. Delivery Price, K.
• Forward Price, F.
• f = long forward contract prices
• Interest for the period er*t dimana t setahun
• f = S - K * e-r*t
• Contoh: Misalkan harga currency US $ 1 =
Rp. 9.300,- SBI rate 7,5% p.a. Forwad
Contract price untuk 3 bulan ke depan bila
delivery price Rp. 9.300,-:
– f = 9300 - 9300*e-7.5*0.25 = 172,75

45. Type Traders
• Hedgers
– Reducing risk that they already face
• Speculators
– Take position to get profit
• Arbitrageurs
– Locking in a riskless profit by entering
simultaneously into transaction in two or more
markets

46. Notasi
• T = time when the forward contract matures (years)
• t = current time
• S = price of asset underlying the forward contract at
time t
• ST = price of asset underlying the forward contract at
time T (unknown at the current time t)
• K = delivery price in the forward contract
• f = value of long forward contract at time t
• F = forward price at time t
• r = risk-free rate of interest per annum at time t, with
continuous compounding, for an investment maturing
at time t.

47. FORWARD CONTRACTS ON A
SECURITY THAT PROVIDES NO
INCOME
• Relationship between F (forward price) and S
(Spot Price) :
F = S*er*(T – t)
• If Fmarket > S*er*(T – t)
– Investor borrow S dollars for period time (T-t)
– Buy the asset, take a short position in the forward contract
– At time T, sold the asset, profit : F – S*er*(T – t)
• If Fmarket < S*er*(T – t)
– Take a long position in the forward contract & short the asset
– Short position leads to a cash inflow of S that can be invested
– At time T, purchase the asset, profit : S*er*(T – t) - F

48. Contoh 1a
• Sebuah forward Contract jatuh tempo 3 bulan dimana
harga sebuah saham $ 40 dan risk-free rate 3 bulan 5%
p.a. Hitung futures price ?
• T-t = 0.25, r = 0.05 , S = 40
• F = S*er*(T-t) = 40*e0.05*(0.25) = $ 40.50
• Jika harga aktual futures di pasar lebih besar dari $
40.50, arbitrageur dapat meminjam uang dan membeli
saham dan men-short futures contract for a net profit
• Jika harga aktual futures di pasar lebih kecil dari $ 40.50,
arbitrageur dapat men-short saham dan melakukan
investasi, ambil futures long-position, kemudian net profit
direalisasikan.

49. Relationship f dan K
• Portfolio A : one long futures contract on the
security plus an amount of cash equal to K*e-r*(T-
t)
• Portfolio B: one unit of the security
• In portfolio A, the cash, assuming that it is
invested at the risk-free rate, will grow to an
amount K at time T. It can then be used to pay
for the security at the maturity of the forward
contract.
• f + K*e-r*(t-t) = S
• f = S – K*e-r*(T-t)

50. Contoh 1b
• Consider a long six-month forward
contract on a one-year discount bond
when the delivery price is $ 950. We
assume that the six month risk-free rate of
interest (continuously compounded) is 6%
p.a and the current bond price is $ 930.
Calculate the long forward contract ?
• So, T-t = 0.50; r = 0.06; K = 950; S = 930.
• f = 930 – 950*e-0.06*0.5 = $ 8.08
• The value of a short forward is -$8.08

51. FORWARD CONTRACTS ON A
SECURITY THAT PROVIDES A
KNOWN CASH INCOME
• Relationship between F and S :
F = (S-I)*er*(T – t)
• If F > (S-I)*er*(T – t)
– An arbitrageur borrow S dollars for period time (T-t)
– Buy the asset, take a short position in the forward contract
– At time T, sold the asset, profit : F – (S-I)*er*(T – t)
• If F < S*er*(T – t)
– Take a long position in the forward contract & short the asset
– Short position leads to a cash inflow of S that can be invested
– At time T, purchase the asset, profit : (S-I)*er*(T – t) - F

52. Contoh 2a
• Sebuah forward contract 10 bulan dengan
harga saham $ 50. Risk-free rate untuk
seluruh jatuh tempo 8% p.a dan ada
dividen sebesar $0.75 per saham
diharapkan terjadi pada akhir 3 bulan, 6
bulan dan 9 bulan. Hitung Forward Price?
• Dividend (I) = 0.75*e-0.08*0.25 + 0.75*e-0.08*0.5
+ 0.75*e-0.08*0.75 = 2.162
• F = (50 – 2.162)*e-0.08*10/12 = $ 51.14

53. Relationship f dan K
• Portfolio A : one long forward contract on the
security plus an amount of cash equal to K*e-r*(T-
t)
• Portfolio B: one unit of the security plus
borrowing of amount I at the risk-free rate
• The income form the security can be used to
repay the borrowing so that this portfolio has the
same value as one unit of the security at time T.
The two portfolio must therefore have the same
value at time t,
• f + K*e-r*(t-t) = S - I
• f = S – I - K*e-r*(T-t)

54. Contoh 2b
• Consider a five-year bond with a price of $900.
Suppose that a forward contract on the bond with a
delivery price of $ 910 has a maturity of one year.
Coupon payments of $60 are expected after six
months and after twelve months. The second
coupon payment is immediately prior to the delivery
in the forward contract. The continuously
compounded risk-free of interest for six months and
one year are 9% pa and 10% pa.
• PV income = 60*e-0.09*0.5 + 60*e-0.1*1 = $111.65
• f = 900 – 111.65 – 910*e-0.1*1 = - $35.05
• The value of a short position is + $35.05

55. FORWARD CONTRACTS ON A
SECURITY THAT PROVIDES A
KNOWN DIVIDEND YIELD
• Assume dividend is paid continuously at an
annual rate q
• Relationship between F and S :
F = S*e(r-q)*(T – t)
• Relationship f dan K
f = S*e-q*(T-t) – K*e-r(T-t)

56. Contoh 3
• Consider a six-month forward contract on
a security that is expected to provide a
continuous dividend yield of 4% pa. The
risk-free rate of interest (with continuous
compounding) is 10% pa. The stock price
is $ 25 and the delivery price is $27.
• So, S = 25; K = 27; r = 0.10; q = 0.04 and
T-t=0.5
• f = 25*e-0.04*0.5 – 27*e-0.1*0.5 = - $1.18
• Forward Price F = 25*e0.06*0.5 = $25.76

57. Profit from a
Long Forward Position
Profit
Price of Underlying
at Maturity, STK

58. Profit from a
Short Forward Position
Profit
Price of Underlying
at Maturity, STK

59. Example: Bunga USD 5% p.a. – Bunga IDR 10% p.a.
Kurs USD/IDR tgl.3/9/2006: 10,200
Forward Rate untuk 6 bulan (jatuh tempo 3/3/2007)
adalah: 10,200 x [(1+10%)^6 / (1+5%)^6]
= 10,200 x [(1.0083)^6 / (1.0042)^6]
= 10,200 x 1.024749
= 10,452.43
Forward Price (for FX rate)
t
t
USD/IDRUSD/IDR
)r(1
)r(1
)(rateSpot)(rateForward
USD
IDR




60. - An FRA is an OTC agreement that a certain interest rate will apply to a
certain principal over a certain future period An FRA is an OTC
agreement that a certain interest rate will apply to a certain principal
over a certain future period
- The buyer of a FRA will be compensated in cash by the seller for any
rise in the reference interest rate over and above the agreed contract
rate  Buy a FRA to hedge against higher future interest rate (e.g. a
prospective borrower expecting to get a loan in a later date)
- The seller of a FRA will be compensated for any fall in interest rates 
Sell a FRA to hedge against future fall in interest rate (e.g. for a
prospective depositor of fund)
- An FRA is an off-balance sheet instrument which can achieve the same
economic effect as a Forward-forward
Forward Rate Agreements (FRAs)

61. Forward Rate Agreements (FRAs)
An example of bid-offer quote on 3-mos FRAs:
3X6 3.60% 3.64%
9X12 4.31% 4.35%
Settlement formula for a FRA:
(LIBOR – Fixed Rate) X (Notional Amount) X (days / 360)

62. An example of FRAs Deal
PT AHM
Bank NKRI
3.64%
3-mos LIBOR
(in month 3)
Loan
Pay 3-mos
LIBOR (4% pa)
FRAs Dealer
Jika pada saat settlement ternyata LIBOR naik menjadi
4%, maka PT AHM akan menerima:
(0.04 – 0.0364) X (1 juta) X (90/360) = USD 1,150
Uang ini sebagai kompensasi bunga LIBOR lebih yang
harus dibayarkan ke Bank NKRI pada tingkat 4% pa 
Biaya bunga dapat fixed di 3.64%
Misalkan PT AHM ingin pinjam USD 1 juta 3 bulan dari sekarang dengan
bunga tetap:
Sells a FRA
Buys
a FRA

63. o Contract Currency and notional Amount (of the notional loan
or deposit)
o Contract period – period from settlement date to maturity
o Settlement Date – when the contract period commences and
cash compensation is paid
o Maturity date – date when contract period ends
o Contract Rate – the agreed rate of interest for the contract
period (FRA price)
o Fixing Date – normally two business days before the
settlement date when the LIBOR reference rate on which
the settlement amount is established, but fixing date may be
the same as settlement date
The Usual FRAs Contract Terms

64. Forwards vs FRAs
• Forwards  Hedging against Market Risk (price
fluctuations)
• FRAs  Hedging against Interest Rate Risk

65. Terima kasih