WEBVTT

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[MUSIC PLAYING]

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Futures contracts are a
type of forward contract

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between a buyer and
a seller of an asset.

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They agree to exchange goods
and money at a future date,

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but at a price and
quantity determined today.

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Futures contracts differ
from other forward contracts

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because they are actively
traded in secondary markets,

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like the Chicago
Mercantile Exchange,

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and the Intercontinental
Exchange.

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Futures contracts
have a wide range

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of underlying assets from
commodities like coffee, corn,

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wheat, currencies, and metals,
and from stock indexes,

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like the Nikkei
225, or the S&P 500.

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Futures markets serve
companies or businesses

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who want to protect
themselves from price

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volatility in
different securities,

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as well as investors
or speculators

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who try to profit from the
change in price of an asset.

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Other aspects to note about
futures contracts-- they

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are standardized, regulated,
and free of counterparty risk

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since exchange
clearinghouses guarantee

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the traders in the
futures markets

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will honor their obligations.

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To start trading
futures, an investor

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selects the asset
they want to trade,

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and makes an initial margin
deposit with a broker.

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The broker will then place the
trade for the specific asset

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with the clearinghouse.

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A maintenance margin
is required in order

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to keep the account active.

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Consider a long position
of three September corn

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contracts, each of which
covers 5,000 bushels.

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Assume the contract
price is $3 per bushel

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and that each contract requires
a margin deposit of $300

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and a maintenance
margin of $200.

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The total initial margin
deposit would be $900,

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and the maintenance margin
for the account would be $600.

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If the price of the bushel
increases $0.04, to $3.04,

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then the investor gains $600.

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3 contracts times 0.04
times 5,000 bushels.

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However, if instead it decreases
$0.04, from $3 to $2.96,

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the investor loses $600.

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The account deposit
would be reduced to $300.

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And the investor
would need to deposit

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$600 of variation margin in
order to get the account back

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to its initial margin.

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[MUSIC PLAYING]

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