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three months. This means that you are paying an extra $5 over the current price for the guarantee of receiving the specified amount of gold in three months. And the further out into the future the contract delivery date goes, the higher the price of the contract. For example, gold contracts maturing in six months may go for $310/oz.

Why would one want to pay more to take a position in such a contract? Some, like the airline company we used as an example, do it for price protection, and others do it as a speculative investment to hopefully profit from a rise in the underlying commodity price without actually having to own the commodity. The former are known as hedgers and the latter are known as speculators.

The gold scenario doesn’t always apply the same way to other commodities, especially those that are cyclical or seasonal in nature. For example, consumable commodities such as corn or meat have always shown historical price fluctuations through different seasons. Take oil as an example. Oil prices, especially those of heating oil, are usually higher during the winter season due to higher consumption. So one can assume that heating oil contracts with delivery dates in winter months will carry higher prices than those maturing in summer months. There are also many other factors used in determining the futures contract prices as related to their underlying commodities. So if you purchase heating oil contracts in January maturing sometime in July, you may actually pay less than the current spot price, since the expectations would be for cheaper heating oil prices in summer time.

When it comes to the world of futures, many factors are considered in determining their prices and in most cases these factors are worked into the futures prices (price discovery). Such price determinations are usually arrived at by fundamental and technical analyses, and these can lead to a deep, detailed, and intricate study which is beyond the scope …