Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
(Note: not all futures contracts result in a physical delivery even at maturity. For example, for index futures, which are generally based on stock indices, one cannot be expected to deliver the index since it is not a tangible product. Instead, for such contracts cash is used as the means for delivery. These are known as cash-settled futures.)
So when we talk about contracts, how much of the underlying commodities do they represent? Well that depends on the contract and the commodity. For starters there are two basic types of trades that can be done with contracts: buy and sell. Buying a contract represents a right to receive a specific quantity and quality of a commodity at a certain time (contract maturity time) in the future. Selling a contract is an obligation to deliver a specific quantity and quality of a commodity at a certain time in the future. The form of delivery is also specified by the contract.
This means that if you purchase a contract on coffee you have the right to receive the coffee at the specified time, and if you sell a contract, you are then obligated to deliver the coffee at the specified time (contract maturity time). Which trade you would or should engage in depends on where you believe the prices of coffee are headed. If you believe that coffee prices are headed higher, then you would purchase contracts. This will lock in your price and if indeed coffee prices increase, you get to receive it at the lower price you had paid for the contract than if you buy it on the spot market.You can then (if you will) turn around and sell the coffee for the going market price and pocket the difference (minus the broker commissions). Now if you believe that coffee prices are headed lower, then you sell contracts and receive payments for them. And if at the time of delivery, coffee prices have fallen, you can buy the specified amount of coffee (perhaps using a part …
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