Invaluable insights on trading today's futures market
The CME Risk Management Handbook provides an accessible overview of the futures market in today's electronic world of trading. Page by page, it outlines the various CME products currently available and explains how those products can be used to manage risk. Financial professionals around the world will find this book to be a comprehensive reference to the most widely used risk management, trading, and hedging strategies. Editors John Labuszewski and John Nyhoff–two of the most highly-regarded names in futures and options research and risk management–put this discipline in perspective and offer readers invaluable insights into successfully operating within this environment.
Chicago Mercantile Exchange Inc. is an international marketplace that brings together buyers and sellers on its trading floors and GLOBEX around-the-clock electronic trading platform. CME offers futures contracts and options on futures, primarily in four product areas: interest rates, stock indexes, foreign exchange, and commodities. John W. Labuszewski, MBA, is a Director of Clearing Development at CME. John Nyhoff, MBA, is a Director of Financial Research and Development at CME.
Table of Contents:
Foreword by Leo Melamed ix
Prologue by Terry Duffy xiii
Acknowledgments xv
Introduction by Craig S. Donohue xvii
CHAPTER 1 Futures Market Fundamentals 1
What Is a Futures Contract? 2
Overview of Popular Financial Futures Contracts 21
Anatomy of a Futures Transaction 35
Conclusion 41
Notes 42
CHAPTER 2 Order Entry and Execution Methodologies 43
Open Outcry/Pit Trading 44
Introduction of the CME Globex Platform 46
Trade Matching Algorithms 50
About Options Markets 69
Ex-Pit Trading 73
Conclusion 78
Notes 79
CHAPTER 3 Role of the Clearinghouse 80
Financial Safeguards 81
Financial Surveillance 89
Default by a Clearing Member 91
Resources Backing CME Group Clearing System 95
Customer Protection 95
Disaster Recovery and Business Continuity 96
Rule Enforcement 96
Financial and Regulatory Information Sharing 99
Conclusion 100
CHAPTER 4 Currency Futures: The First Financial Futures 101
Evolution of Foreign ExchangeMarketplace 101
Over-the-Counter Currency Trading Vehicles 106
Exchange-Traded Currency Futures and Options 115
Foreign Exchange Market Growth and Trends 130
Conclusion 135
Notes 136
CHAPTER 5 Stock Index Futures: The First Financial Futures 137
Mechanics of Stock Index Futures 137
E-Minis versus Exchange-Traded Funds 142
Pricing Stock Index Futures 147
Spreading Stock Index Futures 152
Hedging with Stock Index Futures 158
Portable Alpha Strategies 163
Conclusion 167
Notes 168
CHAPTER 6 Eurodollar Futures: Interest Rate Market Building Blocks 169
Eurodollar Futures Market 169
Speculating on Shape of Yield Curve 180
Term Treasury/Eurodollar (TED) Spreads with
Futures and Options 184
Interest Rate Swap Market 194
Growing Up Together 202
Pricing Relationship 205
Hedging Techniques 208
Conclusion 215
Technical Appendix: Complications and Shortcuts
for Pricing and Hedging Swaps 216
Notes 229
CHAPTER 7 Understanding U.S. Treasury Futures 231
Coupon-Bearing Treasury Securities 231
Treasury Futures Delivery Practices 238
Measuring Risk of Coupon-Bearing Securities 252
Risk Management with Treasury Futures 254
Macro Hedging with Treasury Futures 262
Hedging Corporates with Treasury Futures 266
Trading the Yield Curve with Treasury Futures 269
Conclusion 276
Notes 277
CHAPTER 8 Commodities: Backbone of the Futures Industry 279
What Are Commodities? 280
Grain Markets 293
Livestock Markets 299
Energy Products 315
Precious Metals 327
The Forward Curve 331
Intermarket Commodity Spreading 342
ClearPort Over-the-Counter Clearing Facility 347
Conclusion 350
Appendix: Major Commodity Market Specifications 351
CHAPTER 9 Alternative Investment Market Fundamentals 368
Weather 369
Residential Housing Futures 379
Economic Indicators 397
Conclusion 399
Notes 400
CHAPTER 10 Fundamental Market Indicators 401
Why These Indicators? 402
Trading Volumes 404
Volatility: Daily Net Change 407
Volatility: Daily High-Low Range 408
Conclusions 412
Appendix: Economic Indicator Descriptions 412
Notes 414
CHAPTER 11 Technical Analysis Primer 416
Why Technical Analysis? 416
Interpreting Charts 422
Elliott Wave Theory 443
Intraday Trading Techniques 455
Trend-Following Systems 459
Conclusion 471
CHAPTER 12 Fundamentals of Option Markets 472
What Is an Option? 472
Mathematical Option Pricing Models 481
Historic and Implied Volatilities 494
Measuring Option Performance 504
Conclusion 513
CHAPTER 13 Option Trading Strategies 515
Option Spreads 515
Horizontal Spreads 526
Diagonal Spreads 532
Comparing Verticals, Horizontals, and Diagonals 537
Weighted Spreads 538
Volatility-Driven Strategies 544
Specialty Option Strategies 560
Matching Strategy and Forecast 565
Conclusion 566
CHAPTER 14 Hedging with Options 568
Baseline Futures Hedge 568
Buying Protection with Puts 569
Yield Enhancement with Calls 572
In- and Out-of-the-Money Options 575
Matching Strategy with Forecast 577
Collar Strategy 578
Delta-Neutral Hedge 579
Conclusion 581
About the Authors and Contributors 583
Index 587
