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.