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1. Long Position

   • Conventional investing strategy
   • Involves BUYING a security with expectation that price will INCREASE
   • Investing IN a company

2. Short Position

   • Less common investing strategy
   • Involves BORROWING and subsequently SELLING a security, with expectation that price will DECREASE
   • Investing AGAINST a company

3. Hedging

   • Using a futures position to offset a natural risk exposure
   • Example: Assume a financial institution holds several long-term fixedd-rate mortgages. This creates an interesr rate risk exposure. They may choose to hedge this risk by SHORTING Treasury Bond futures contracts
   • Hedging with Futures Contracts
     • Helps reduce risks from areas you dont have a competitive advantage and allows you to focus on risks where you DO have an advantage
     • Generally low cost
     • Reduces UPSIDE risk as well as downside risk
     • May not be a perfect hedge

4. Speculating

   • Using a futures position to create a risk exposure in an attempt to profit from that risk
   • Example: Assume you think gas prices are going to rise over the next couplbe of months. You decide to purchase (go long) 5 RBOB Gasoline futures contracts that expire in 3 months
   • Speculating with Futures Contracts
     • Provides tremendous leverage potential
     • Typically liquid markets
     • May help diversify portfoliao
     • Leverage can work against you
     • Zero Sum Game
     • The 'evil' speculators
       • Provide liquidity to markets
       • Help with price discovery

5. A Futures Contract

   • A Futures Contract is an agreement to purchase (or sell) an asset at a later date for a price set today - THe current price of the futures contract in the market
   • Types of Contracts
     • Equity Index
     • Interest Rate
     • Grains
     • Livestock
     • Precious Metals
     • Energy
   • Performance Bonds (Margins)
     • A performance bond (or margin) is an initial deposit to (similar to a security deposit) that you must put up you initiate a contract
     • Market-to-market
     • Initial vs. Maintenance Margin

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