Microsoft PowerPoint - PoF.ppt

Clearing corporationƒ 150

Clearing corporation (CC)

ƒ

Futures are not initiated between individu

als or corporations BUT each party has

contract with a CC, i.e.

long

short

ABCCCDE F... open interest = 3 contracts ... # of outstanding contracts

Note: if A defaults B isn’t conc

erned; the only credit risk

/ default risk A faces is that

the CC defaults

Ä

virtually no credit risk

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The CC effectively clears, i.e. if A buys from B (like above) and then some time later sells to Z the CC cancels out

both of A’s contracts, i.e.

long

short

AACCCBE DZF... open interest = 3 contracts ... # of outstanding contracts

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CC levies a small tax on all transa

ctions ... insurance against default

Derivative securities: Futures - Introduction