Gary Bentley
Ricardo International is a manufacturing firm that specializes in plastic components that are used by the computer hardware industry. Recently they have expanded their business sells from the Midwest region of the U.S. to customers outside the U.S. and have requested a report and discussion regarding some issues in relation to futures contracts. Tom Curtis is the treasurer of the company and would like know how the use of futures contracts can be utilized by the firm, in the future, to hedge currency risk and interest rate risk. For today’s discussion we will cover the identity of futures markets benefits, the functions and importance of clearinghouse, and the concept of marked to market. This week’s discussion will lead up to next week’s as it relates to describing regulatory responsibilities of the National Futures Association and the Commodity Futures Trading Commission. Additionally, we will discussion how and why both agencies were created in first place (Mitchell, 2013).
In order to resolve some issues Mr. Curtis and Ricardo International in relation to futures contracts we will need to first discuss what futures contracts are. Futures contracts are contractual agreements made by individuals buying and selling commodities or financial instruments at future, pre-determined prices. They detail underlying asset’s quality and quantity as well as standardize the facilitated trading of futures exchanges. Some contracts are settled by physically delivery the asset or simply using cash to purchase the asset in question (“Investopedia”, n.d.). The trading of futures contracts is usually done within futures markets which are auction markets used by individuals to sell and buy contracts through the use of open yelling and hand signals in a trading pit (“Investopedia”, n.d.). Some benefits associated with these futures markets, as they pertain to firms like Ricardo International, are there is little chance of someone taking unfair advantages using “insider information” and that they are very liquidated which allows buyers and sellers taking market orders, prices that aren’t volatile or jump between levels in a short period of time. Additionally, firms may also benefit from these markets because future contracts obtained through these markets, regardless of the length of the contract, tend to have commodities where 60% of them are treated like long term capital gains and the other 40% as short term capital gains. One other possible benefit involves investors being able to make more money more quickly than in any other market. This is because futures prices tend to move quicker than in cash markets and can be traded at 10 times the amount of the initial margin (“eToro”, n.d.).
The next issue need to be discussed involves identifying the most important functions and importance of the clearinghouse. A clearinghouse is a like third-party agency or corporation that work to clear trades, settle trading accounts, collect and maintain margin monies, report trade data, and regulate deliveries (“Investopedia”, n.d.). One of the most important functions of a clearinghouse is to act as counterparties to all trades taking place within an exchange. This ensures that traders don’t concern themselves with credit risk exposure by the clearinghouse assuming all of the risk (Cotter & Dowd, 2005). Another main function of a clearinghouse involves serving as a review point for histories bonds and commodity packages being handled by sellers. This means that sellers will receive a review by a clearinghouse compliance department in regards to registered buyers they have on file. They will then issue a clearance letter that details a buyer’s requirements on items missing or not acceptable to the buyer. This will then inform the potential seller of any concerns or inconsistencies that are found with the proposed Asset package prior to any trading. Overall, the clearinghouse allows applicants access to information they would normally need to acquire through the use of various brokers who have varied knowledge or erroneous information (Intelligent Global Marketing Approach, n.d.). When it comes to why a clearinghouse is important is its many roles involving an organization’s financial accounts. Clearinghouses, in general, play important roles in things like settling international payments as well as transactions involving banks, stocks, and commodity exchanges. Additionally, they can work as voluntary associates of banks to simplify checks, drafts, and notes exchanges as well as settling balances (“Merriam-Webster”, n.d.).
Finally, we finish this week’s discussion by addressing one final issue which is explaining the concept of marked to markets. Marked to markets, or mark to market (MTM), is defined as a realistic appraisal of an organization’s current financial situation while measuring the fair value of asset or liability accounts over time. Additionally, it could mean the accounting act of recording the price or value of an account to reflect current market value instead of book value or the net asset value (NAV) of a mutual fund’s value being based on current market valuations (“Investopedia”, n.d.). The Mark to market concept comprises of accounting practices organizations use to value and report assets at market prices. The market prices are prices that assets are traded for in public exchanges. Overall, these practices are derived from accounting principles of prudence and are typically used for Level 1 and 2 assets. Additionally, the use of mark to marketing accounts can also be used for helping to value futures contracts where final values are not known until expiration. However, at the end of each day the contracts value is adjusted so that is will reflect that day’s closing price (“Wikinvest”, n.d.). Overall, the use MTM will help an organization to either balance or rebalance a diversified portfolio that contains the various assets they may hold at any given time.
Samy Derival
Intro
Over the year the derivatives markets grew at exponential rate; part of that would certainly be the increasingly ever-expanding world economy. In fact, every year more and more instruments are being created to meet the rigorous demands of investors. Derivatives instruments, such as futures, contracts, options, and swaps are being used daily for both hedging and speculative purposes.
Futures Markets
A future is generally a contractual agreement to buy or sell a particular commodity; its value is inherent of the quality and quantity of the underlying asset. There are a number of participants in futures markets, for instance hedgers, speculators, scalpers, day traders and positions traders; depending on the participant’s position, he/she may either increase or decrease risks.
Benefits of Using Futures Markets
Let’s enlighten Mr. Curtis on possible benefits of using futures markets for the company. The global marketplace is subject to numerous foreign regulations therefore futures markets provide vital economic information to help determine actual prices based on today’s and tomorrow’s estimated amount of supply and demand. Perhaps the best advantage of futures markets is related to risk reduction. Risks are reduced or hedged because prices are being preset. Consequently if Mr. Curtis uses the futures markets it will help limit losses that may be caused by any fluctuations in the cash markets.
Clearing House
The Clearing House is referred to as a third party of all futures and options contracts; it is in fact a separate entity whose primary function is to settle trading accounts, clear trades, collect and maintain margin monies, regulate deliveries and reports trading data.
Marked to Markets
The term marked-to-market can be attributed to different situations; first off it is referred to as a measure of the fair value of accounts, which can be changed at any time. In a sense, it seeks out to provide a realistic appraisal of a firm’s current financial conditions. Secondly, it can be viewed as the accounting act of recording the net worth of a security, a portfolio in order to reflect its current market value as opposed to the book value. Lastly, it may be attributed to the net asset value (NAV) of a mutual fund in the light of the most current market valuation.
Hi Pichchapa Jeensamut ,
I found your post very interesting. I agree that there are many benefits of using managed futures markets. It can help offset any volatility in ones investment portfolio with its global trade possibilities. You make a very good point that futures can offer the investor with new and different investment opportunities. Do you think that an investor should always have futures as part of their over all investment plane based on offsetting volatility or for the flexibility to trade on the global market?Thank you
Jack Werner
