Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 85

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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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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