AREC 384 futures market
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document that specifies the terms of delivery for the product being traded
month in which the product is to be delivered
specific position to which product is to be delivered
buyers of a futures contract are in a "long position"
sellers of a futures contract are in a "short position"
taking an opposite position in the futures (or cash market) to shift (minimize) risk
trades that do not have an offsetting position in the cash market
completing the terms of a futures contract at its expiration date. Number of ways to settle a futures contract
ways to settle a futures contract
- cash settlement
- trade the contract (offsetting or lifting the hedge)
- = cash price - (nearby) futures price
- usually more predictable than cash or futures prices
positive basis implies ...
cash price > futures price
negative basis implies ...
cash price < futures price
factors affecting the basis
- cost of transportation
- supply and demand conditions in cash market relative to delivery points for the futures market
- quality differences in cash commodity and product specified in futures contract
- quantity of stocks and storage space in cash market
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