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 97

occasions where you haven't settled your contracts, you would buy gold on the spot market at $300/oz. and make the delivery, and you still would be profiting $5/oz. Finally, if you actually had the gold in your possession from the beginning, you could simply deliver it knowing that considering the spot price of $300/oz. you made a good move by selling those contracts at $305/oz.

Convergence

As a contract nears its maturity, its price gets closer and closer to the spot price of its underlying commodity. Suppose gold is currently trading at $300/oz. in the spot market. It is then conceivable that gold contracts maturing in three months would trade at $305/oz. This is purely based on the belief of the traders that gold would indeed be trading at $305/oz. in three months. Now if gold continues to stay at $300/oz., those contract prices would continue to shrink as they get closer to maturity. With two weeks to go and gold still trading at $300/oz., those contracts may be worth $300.50/oz. Finally at maturity, those contract prices will be exactly the same price as the spot price of gold at that time. So if at maturity gold is still trading at $300/oz. on the spot market, those mature contracts will also be worth $300/oz. This is known as convergence, where the price of the futures and their underlying commodities converge at maturity. Now you may wonder which one actually moves closer to the other. In reality it makes no difference. Both the futures and their underlying commodities affect each other's prices, and in the end supply and demand set the tone for the convergence price.

Leverage And Margin

You must be wondering how the average person can begin trading futures. After all, one future gold contract at $305/oz. is worth roughly


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