The chapters in this document are displayed in reversed order, with the last chapter
appearing first. This change ensures all chapters are included in the Solutions. Ch 1 to 15 ✅
Chapter 15 Futures Markets and Securities
Outline
Learning Objectives
I. The Futures Market
A. Market Structure
1. Futures Contracts
a. Options Versus Futures Contracts
2. Major Exchanges
B. Trading in the Futures Market
1. Trading Mechanics
2. Margin Trading
Concepts in Review
II. Commodities
A. Basic Characteristics
1. A Commodities Contract
2. Price Behaviour
3. Return on Invested Capital
B. Trading Commodities
1. Speculating
2. Spreading
Concepts in Review
III. Financial Futures
A. The Financial Futures Market
1. Foreign Currencies, Interest Rates, and Stock Indexes
2. Contract Specification
3. Prices and Profits
B. Trading Techniques
1. Speculating in Financial Futures
a. Going Long a Foreign Currency Contract
b. Going Short an Interest Rate Contract
2. Trading Stock-Index Futures
a. Hedging with Stock-Index Futures
3. Hedging Other Securities
a. Hedging Foreign Currency Exposure
C. Financial Futures and the Individual Investor
D. Options on Futures
Concepts in Review
© 2026
, Chapter 15 Futures Markets and Securities 269
Chapter Summary
Discussion Questions
Problems
Case Problem 15.1 T.J.’s Fast-Track Investments: Interest-Rate Futures
Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock-index Futures
StockTrak Exercise
CFA Exam Questions
Key Concepts
1. The origins and basic operating characteristics of the futures market
2. The major organized exchanges that deal in commodities and financial futures and the role
of hedgers and speculators
3. The basic characteristics of commodity futures contracts and the main trading strategies
involved
4. How prices in the futures market behave and how profits are made and lost
5. The trading techniques used with futures and a measurement of investment returns
6. The risk-return characteristics of these securities and the strategies investors employ when
dealing in commodities and financial futures
7. Commodities futures and financial futures are compared; currency futures, interest rate
futures, stock-index futures, and single-stock financial futures are covered.
Overview
This chapter discusses the futures market and the various commodities and financial futures
available to investors.
1. First, the chapter describes the futures market. Differences between the cash (spot) and
futures markets should be reviewed by the instructor. The similarities and differences
between a futures contract and a call option should also be mentioned.
2. Futures exchanges, the nature of the futures contract, and trading mechanics are also
presented in some detail. The instructor may wish to note the colourful tradition of the
major exchanges, as well as the differences between futures trading and trading on stock
exchanges in terms of commissions, deposits, delivery, pricing, etc. If the classroom is
equipped for Internet access, some informative and entertaining video clips can be found
by searching YouTube for “Commodity Futures Trading Pits.”
3. The next section covers commodity trading, specific contract terms, price quotations, and
return on invested capital. Commodities futures trading is much like options trading to the
extent that it, too, can be used to speculate, hedge, or initiate spreads. The instructor may
emphasize that in futures markets, speculators operate under different rules than hedgers.
4. Individual investors are attracted to commodities markets because of the high return per
dollar invested. However, the risks are substantial, and it should be emphasized that only
those investors who are well versed in trading mechanics and pricing mechanisms—and
who can tolerate large losses—should consider these markets.
© 2026
,270 Smart/Zutter/Vishwakarma/Yüce • Fundamentals of Investing, Second Canadian Edition
5. Financial futures are discussed in the next part of the chapter. The different interest rate,
foreign currency, stock index, and single-stock futures available to investors should be
mentioned. In addition, the characteristics and valuation concepts applicable to the
different kinds of financial futures should be stressed. Once again, the strategies of
hedging, speculating, spreading, and short selling should be repeated. It should be
emphasized that, as in the commodities futures market, returns can be high, but a high
degree of investing sophistication is needed for success.
6. A discussion of futures options follows. Here, attention should center on the pricing and
valuation of these securities as well as how they contrast with other types of puts and calls.
Students are often confused as to why investors would want to use a futures contract if
futures options are available (or vice versa), so some time could be spent
discussing/illustrating the comparative advantages and disadvantages of futures versus
futures options.
7. Much effort went into updating the illustrations; however, the institutional details of future
markets evolve rapidly, so the instructor is urged to review the financial press and verify
that no subsequent changes have been made.
Answers to Concepts in Review
15.1 A futures contract is a firm commitment (i.e., an obligation) to deliver or receive a certain
amount of a specified item at some specified date in the future for a specified price, or
futures price. The seller of the contract agrees to make the specified future delivery, and the
buyer agrees to accept and pay the futures price for it at the specified future date. Futures
contracts are usually written for a period of one year or less (though some have lives that
extend for as long as three years) and are written on a wide variety of commodities and
financial instruments. Futures contracts can be used for speculating—earning a profit on
expected swings in the price of the futures contract based on movements in the price of the
underlying commodity or security. In addition, they can be used for spreading—a
conservative tactic that combines two or more different futures contracts into a single
investment position—or for hedging a position in the underlying commodity or financial
asset.
15.2 Whenever a commodity changes hands in exchange for a cash price paid to the seller, we
say that this transaction has taken place in the cash market. In contrast, the same
commodity also can be exchanged in the futures market, where the seller would not
actually deliver the commodity, nor would the buyer pay for it, until a mutually agreed
upon date in the future. In a futures market, the buyer and seller agree to the price up front,
but there is no exchange of goods for cash until some future date.
15.3 The only source of return from commodity futures is capital gains. Futures do not have any
kind of current income like dividends and interest. Of course, since one can buy (go long)
or sell (go short) in futures, one can earn capital gains on a decrease as well as an increase
in the price of a futures contract.
15.4 The futures market contains two types of traders: hedgers and speculators. Hedgers are the
producers, processors, and financial managers who use futures to protect their interest in
the underlying commodity or financial instrument. Hedgers provide the underlying strength
of the futures market and the reason for its existence. Speculators, in contrast, seek profits
from price swings and give the market liquidity; they take positions as the buyers and the
sellers against the hedgers. Without hedgers to provide the basic foundation and
speculators to bear the risk and provide liquidity, the market could not exist or at least not
operate very efficiently
© 2026
, Chapter 15 Futures Markets and Securities 271
15.5 All commodity and futures contracts are traded on a margin basis. An investor can acquire
a futures contract by depositing a small portion of the total cost of the contract with a
broker (this deposit usually runs between 2% and 10% of the value of the contract). There
is no borrowing required on the part of the investor; the margin is a security deposit with
full payment due at delivery. Margin requirements are usually somewhat higher for
speculators than for hedgers.
a. The initial margin specifies the amount of investor capital that must be deposited with
the broker at the time of the transaction and represents the amount of money required
to make a given investment. To make sure an adequate margin is always maintained on
each transaction, a maintenance margin is also stipulated. This is slightly less than the
initial margin and establishes the minimum amount of margin that must be kept in the
account at all times.
b. Yes, if the market moves against the investor and the value of the contract drops by
more than the difference in the initial deposit and the maintenance deposit, the investor
must deposit enough cash to bring the position back to the initial margin level. In other
words, if the margin deposit shrinks so much that it falls below the amount required by
the maintenance deposit, you’ll be faced with a margin call.
15.6 The five essential elements of a commodities contract are as follows:
(1) The product: the commodity name, such as No. 2 yellow corn
(2) The exchange: the exchange where the contract is traded
(3) The size of the contract: in bushels, pounds, etc.
(4) The pricing unit: cents per pound, dollars per ton, etc.
(5) The delivery month: when the contract expires
The size of the contract, the price of the underlying commodity, and the pricing unit have
the most effect on the contract price. The delivery month also plays a role in the price of the
contract.
15.7 a. Settlement price: the last price of the day, or the closing price
b. Daily price limit: the limit of interday price change in the underlying commodity. No
trading can be done outside this limit
c. Volume: the number of futures contracts traded during the day.
d. Maximum daily price range: the limit on the amount the price of the underlying
commodity can change in one day, usually twice the daily price limit.
e. Delivery month: the month when the futures contract must be delivered; defines the life
of the contract
15.8 The only source of return for a futures contract is capital gains. Investors realize capital
gains when prices move in a favourable direction (prices rise with a long future or prices
fall with a short future). There is no current income of any kind in a futures contract.
The return on commodity futures is calculated using the return on invested capital. This
measure is based on the amount of money actually invested in the contract, rather than the
value of the contract itself. Hence, it takes the effect of leverage into account (as all futures
trading is done on margin).
Selling price − Purchase price
of contract of contract
Return on invested capital =
Amount of margin deposit
15.9 One may invest in commodities by (1) hedging, (2) spreading, or (3) speculating. Hedging
is used by producers and processors to protect a position in a product or commodity. It is a
© 2026
appearing first. This change ensures all chapters are included in the Solutions. Ch 1 to 15 ✅
Chapter 15 Futures Markets and Securities
Outline
Learning Objectives
I. The Futures Market
A. Market Structure
1. Futures Contracts
a. Options Versus Futures Contracts
2. Major Exchanges
B. Trading in the Futures Market
1. Trading Mechanics
2. Margin Trading
Concepts in Review
II. Commodities
A. Basic Characteristics
1. A Commodities Contract
2. Price Behaviour
3. Return on Invested Capital
B. Trading Commodities
1. Speculating
2. Spreading
Concepts in Review
III. Financial Futures
A. The Financial Futures Market
1. Foreign Currencies, Interest Rates, and Stock Indexes
2. Contract Specification
3. Prices and Profits
B. Trading Techniques
1. Speculating in Financial Futures
a. Going Long a Foreign Currency Contract
b. Going Short an Interest Rate Contract
2. Trading Stock-Index Futures
a. Hedging with Stock-Index Futures
3. Hedging Other Securities
a. Hedging Foreign Currency Exposure
C. Financial Futures and the Individual Investor
D. Options on Futures
Concepts in Review
© 2026
, Chapter 15 Futures Markets and Securities 269
Chapter Summary
Discussion Questions
Problems
Case Problem 15.1 T.J.’s Fast-Track Investments: Interest-Rate Futures
Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock-index Futures
StockTrak Exercise
CFA Exam Questions
Key Concepts
1. The origins and basic operating characteristics of the futures market
2. The major organized exchanges that deal in commodities and financial futures and the role
of hedgers and speculators
3. The basic characteristics of commodity futures contracts and the main trading strategies
involved
4. How prices in the futures market behave and how profits are made and lost
5. The trading techniques used with futures and a measurement of investment returns
6. The risk-return characteristics of these securities and the strategies investors employ when
dealing in commodities and financial futures
7. Commodities futures and financial futures are compared; currency futures, interest rate
futures, stock-index futures, and single-stock financial futures are covered.
Overview
This chapter discusses the futures market and the various commodities and financial futures
available to investors.
1. First, the chapter describes the futures market. Differences between the cash (spot) and
futures markets should be reviewed by the instructor. The similarities and differences
between a futures contract and a call option should also be mentioned.
2. Futures exchanges, the nature of the futures contract, and trading mechanics are also
presented in some detail. The instructor may wish to note the colourful tradition of the
major exchanges, as well as the differences between futures trading and trading on stock
exchanges in terms of commissions, deposits, delivery, pricing, etc. If the classroom is
equipped for Internet access, some informative and entertaining video clips can be found
by searching YouTube for “Commodity Futures Trading Pits.”
3. The next section covers commodity trading, specific contract terms, price quotations, and
return on invested capital. Commodities futures trading is much like options trading to the
extent that it, too, can be used to speculate, hedge, or initiate spreads. The instructor may
emphasize that in futures markets, speculators operate under different rules than hedgers.
4. Individual investors are attracted to commodities markets because of the high return per
dollar invested. However, the risks are substantial, and it should be emphasized that only
those investors who are well versed in trading mechanics and pricing mechanisms—and
who can tolerate large losses—should consider these markets.
© 2026
,270 Smart/Zutter/Vishwakarma/Yüce • Fundamentals of Investing, Second Canadian Edition
5. Financial futures are discussed in the next part of the chapter. The different interest rate,
foreign currency, stock index, and single-stock futures available to investors should be
mentioned. In addition, the characteristics and valuation concepts applicable to the
different kinds of financial futures should be stressed. Once again, the strategies of
hedging, speculating, spreading, and short selling should be repeated. It should be
emphasized that, as in the commodities futures market, returns can be high, but a high
degree of investing sophistication is needed for success.
6. A discussion of futures options follows. Here, attention should center on the pricing and
valuation of these securities as well as how they contrast with other types of puts and calls.
Students are often confused as to why investors would want to use a futures contract if
futures options are available (or vice versa), so some time could be spent
discussing/illustrating the comparative advantages and disadvantages of futures versus
futures options.
7. Much effort went into updating the illustrations; however, the institutional details of future
markets evolve rapidly, so the instructor is urged to review the financial press and verify
that no subsequent changes have been made.
Answers to Concepts in Review
15.1 A futures contract is a firm commitment (i.e., an obligation) to deliver or receive a certain
amount of a specified item at some specified date in the future for a specified price, or
futures price. The seller of the contract agrees to make the specified future delivery, and the
buyer agrees to accept and pay the futures price for it at the specified future date. Futures
contracts are usually written for a period of one year or less (though some have lives that
extend for as long as three years) and are written on a wide variety of commodities and
financial instruments. Futures contracts can be used for speculating—earning a profit on
expected swings in the price of the futures contract based on movements in the price of the
underlying commodity or security. In addition, they can be used for spreading—a
conservative tactic that combines two or more different futures contracts into a single
investment position—or for hedging a position in the underlying commodity or financial
asset.
15.2 Whenever a commodity changes hands in exchange for a cash price paid to the seller, we
say that this transaction has taken place in the cash market. In contrast, the same
commodity also can be exchanged in the futures market, where the seller would not
actually deliver the commodity, nor would the buyer pay for it, until a mutually agreed
upon date in the future. In a futures market, the buyer and seller agree to the price up front,
but there is no exchange of goods for cash until some future date.
15.3 The only source of return from commodity futures is capital gains. Futures do not have any
kind of current income like dividends and interest. Of course, since one can buy (go long)
or sell (go short) in futures, one can earn capital gains on a decrease as well as an increase
in the price of a futures contract.
15.4 The futures market contains two types of traders: hedgers and speculators. Hedgers are the
producers, processors, and financial managers who use futures to protect their interest in
the underlying commodity or financial instrument. Hedgers provide the underlying strength
of the futures market and the reason for its existence. Speculators, in contrast, seek profits
from price swings and give the market liquidity; they take positions as the buyers and the
sellers against the hedgers. Without hedgers to provide the basic foundation and
speculators to bear the risk and provide liquidity, the market could not exist or at least not
operate very efficiently
© 2026
, Chapter 15 Futures Markets and Securities 271
15.5 All commodity and futures contracts are traded on a margin basis. An investor can acquire
a futures contract by depositing a small portion of the total cost of the contract with a
broker (this deposit usually runs between 2% and 10% of the value of the contract). There
is no borrowing required on the part of the investor; the margin is a security deposit with
full payment due at delivery. Margin requirements are usually somewhat higher for
speculators than for hedgers.
a. The initial margin specifies the amount of investor capital that must be deposited with
the broker at the time of the transaction and represents the amount of money required
to make a given investment. To make sure an adequate margin is always maintained on
each transaction, a maintenance margin is also stipulated. This is slightly less than the
initial margin and establishes the minimum amount of margin that must be kept in the
account at all times.
b. Yes, if the market moves against the investor and the value of the contract drops by
more than the difference in the initial deposit and the maintenance deposit, the investor
must deposit enough cash to bring the position back to the initial margin level. In other
words, if the margin deposit shrinks so much that it falls below the amount required by
the maintenance deposit, you’ll be faced with a margin call.
15.6 The five essential elements of a commodities contract are as follows:
(1) The product: the commodity name, such as No. 2 yellow corn
(2) The exchange: the exchange where the contract is traded
(3) The size of the contract: in bushels, pounds, etc.
(4) The pricing unit: cents per pound, dollars per ton, etc.
(5) The delivery month: when the contract expires
The size of the contract, the price of the underlying commodity, and the pricing unit have
the most effect on the contract price. The delivery month also plays a role in the price of the
contract.
15.7 a. Settlement price: the last price of the day, or the closing price
b. Daily price limit: the limit of interday price change in the underlying commodity. No
trading can be done outside this limit
c. Volume: the number of futures contracts traded during the day.
d. Maximum daily price range: the limit on the amount the price of the underlying
commodity can change in one day, usually twice the daily price limit.
e. Delivery month: the month when the futures contract must be delivered; defines the life
of the contract
15.8 The only source of return for a futures contract is capital gains. Investors realize capital
gains when prices move in a favourable direction (prices rise with a long future or prices
fall with a short future). There is no current income of any kind in a futures contract.
The return on commodity futures is calculated using the return on invested capital. This
measure is based on the amount of money actually invested in the contract, rather than the
value of the contract itself. Hence, it takes the effect of leverage into account (as all futures
trading is done on margin).
Selling price − Purchase price
of contract of contract
Return on invested capital =
Amount of margin deposit
15.9 One may invest in commodities by (1) hedging, (2) spreading, or (3) speculating. Hedging
is used by producers and processors to protect a position in a product or commodity. It is a
© 2026
