Future Exchange Market: Get All Your Answers Here

[steven187]

hello all

I never really understood the future exchange Market. Can anyone explain it to me in detail, any information would be helpful?

thank you

 

[selfAdjoint]

There are various financial instruments which are valued at some specific future date. For example a contract to deliver so many tons of pork bellies on a certain day in the future. Or some companies give their officers "puts", permissions to sell so many shares of the company's stock at such-and-such a price on a given date in the future. Or "calls", the right to buy so many shares at some given price after a date in the future.

So futures traders deal in these things, and the price goes up and down based on what people think is going to happen, and traders take long positions (buying these things on credit, hoping to sell at a higher price and make a profit after paying back the loan and interest) or short positions (selling more of them than they possess, hoping to cover the sale later by buying at a lower price).

The futures markets are considered more professional than the stock exchanges by the government, so there isn't the same pressure to restrict trading practices in the interest of the ignorant public.

 

[steven187]

hello there

well what I don't understand is, how it operates? can anything be contracted in the futures market? I am still confused about long and short positions? also what determines the price, like let's say the price of gold, I see that we have a physical market and the futures market, do they have different prices of gold in each market? what determines these prices? and how does each market relate to each other? can anybody trade in futures? and how is it a form of hedging? and how is it different to the forward contract? these are some of the things that i am confused about

please help

thank you

steven

 

[selfAdjoint]

The contracts available fall into definite categories. Various specific commodities, including precious and utility metals, and financial instuments, of which puts and calls are just the simplest baby things; that whole financial area is collectively called "derivatives", and so on. Different traders specialize in different items and you open an account with a trading house and choose from what they have available.

What don't you understand about long and short? Each of them amounts to taking a financial risk, looking for enhanced gain if your belief comes true. For long that belief is that certain prices will increase, for short it is that they will decrease.

 

[steven187]

hello there

well I have done a bit more research and what you have written above has made it a bit more clearer, but this is what I don't get, for example we have a miner and a jewller say, they want to hedge against unfavourable expectations in the price let's say the price today is $400/oz let's say both the miner and the jewller agrees to trade at $410/oz ( how did they work out there forward price?) in a month time, so both parties will create a futures contract, and this is done where the miner sells a futures contract ( who would he be selling to? is it the jewller) and the jeweller buys the future contract ( who is the jewller buying from?) such that they both opened a position, the miner has a short position and the jewller has a long position, ( how many future contracts are getting traded one or more?) so now each party has a choice weither to close out before settlement date or on the settlement date ( is that correct?) let's say that the miner wants to trade his position because the price went up then to close out his position he would buy the future contract ( but who is he buying from? there could only be one person who has the future contract and that is the jewller he is going to trade with in the physical market would that be correct?)
lets also say that the jewller wants to close out his position before the settlement date he would sell the future contract ( to who would he be selling to? if he is going to sell to the miner then both parties can close out only if they both agree to close out I would believe that that would be impossible, and if they close out before the settlement date wouldn't it be true that there was no point of entering a futures contract in the first place? another thing is they say that investors who are speculators are active traders in the futures market where do they play in the example above? also they say that the futures market is like the stock exchange but with the stock exchange it matches buyers and sellers based upon there quote like buy at $20 per google shares say, in the futures market what is there quote if they are not involved in the physical market? from my understanding investors trade in the futures market by quoting there expectations of there forward price (would this be correct?), let's say that an investorA believes the price of gold will be $420/0z so another investorB who has the same expectations would sell his future contracts to investorA to close out,( but how much are they selling these contracts for? what is the value of these contracts to investors? how are the buyer and the seller of the futures contract matched?) please help

thank you

steven

 

[selfAdjoint]

for example we have a miner and a jewller say, they want to hedge against unfavourable expectations in the price let's say the price today is $400/oz let's say both the miner and the jewller agrees to trade at $410/oz ( how did they work out there forward price?) in a month time, so both parties will create a futures contract, and this is done where the miner sells a futures contract ( who would he be selling to? is it the jewller) and the jeweller buys the future contract ( who is the jewller buying from?) such that they both opened a position, the miner has a short position and the jewller has a long position, ( how many future contracts are getting traded one or more?)

The miner and the jeweller don't usually trade with each other; that's why we have these commodity exchanges. Prices are set by market forces on the exchanges. In the Chicago exchange this is done by "open outcry"; a trader who specializes in gold (in this case) will shout out the price he is offering, either to sell at or to buy at. He also listens for anybody shouting a price on the other end of the deal. If there is a gap between offered and bid proces, someone will have to change- it's a horse trade. Many traders may be involved, and from their various offers and bids a momentary price is astablished and a contract drawn up, between the trading houses. The miner and the jeweller have their contracts with the trading houses, usually just to get the best price for the given time period. This is the free-market price mechanism in its most basic form, and illustrates how it is a dynamic variable, not a top-down prescription.

The traders usually make their money out of small daily swings in the dynamic price, but sometimes even today some big rich trading house may try to "corner the market" in some commodity. It almost certainly wouldn't be gold, with all the laws about that, but the Texas Hunt brothers tried to corner silver several years ago (well I guess it's a couple of decades ago now...).