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of the proceeds from the sale of the contracts, theoretically speaking)
on the spot market and make the delivery (to whoever bought the
contracts from you) and again pocket the difference.
Actually you don’t really know or care who exactly is at the opposite
end of your trade. The trades and deliveries are actually done through
a clearing house, which is sort of a middleman acting on behalf of the
buyers and sellers. The clearing house also makes sure that the actual
commodity exists (perhaps in a warehouse) for every contract sold.You
can imagine that without a system of checks and balances anyone could
sell contracts, and traders would have no assurance of the validity of the
contracts, which could result in a breakdown of the whole trading
process.As contracts get bought and sold on the exchange, and most get
settled prior to maturity, it is sometimes forgotten that there are real
commodities behind all of them.
I know the above concepts may be a bit difficult to grasp, so you may
want to read the section again to fully digest them because things are
going to get a little more complicated. The objective for the traders is to
buy low and sell high (when buying contracts) or sell high and buy low
(when selling contracts). But before we go further let’s take a quick
detour to see what contracts actually represent. Each futures contract
represents an arbitrary but standardized amount of its underlying
commodity. The amount generally depends on the exchange where the
contract is traded. The following are typical quantities (a.k.a. trading
unit) of some commodities denoted by their futures contracts: …
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