All Annotations of Gambling with the futures[Preview]

saved by1 people, first byAnton Viesel on 2008-05-19, last byArabica Robusta on 2008-07-26

• There are many causes of this crisis. One obvious one is the rising price of oil, which is increasing transportation and other costs for agricultural products. Another is profiteering on the part of the heavily subsidized agribusiness sector. Other causes include the increased use of corn in ethanol production, rather than for food, as well as the damaging effects of free trade on small farmers and changing consumption patterns.
• There is another force is at play, as well: speculators are driving up the prices of all commodities, including wheat, corn, soy, etc., because of intense trading on what are known as futures markets.
• Today, traders of exchange-traded funds, hedge funds and other speculators far outstrip the actual buyers and sellers of commodities. As a result, these speculators have generated a big demand for futures contracts, therefore helping send the prices of underlying commodities upward.
• The largest futures exchange is the Chicago Board of Trade, which has been in operation since 1848. All futures contracts are registered at such exchanges, which then create the benchmarks for further contracts.
• at the end of every day, the two parties must settle up based on where the futures price of that commodity ended the day.
• These adjustments are made daily, depending on how the price of futures changes, until the contract expires, the goods are delivered and the final settlements are made.

• HISTORICALLY, FUTURES contracts were traded primarily between producers of commodities and consumers of commodities at large, regulated commodities exchanges. Most futures contracts eventually resulted in the actual delivery of a commodity on a set date.

  
  

  That's all changed in recent years. Now, the bulk of firms trading on futures exchanges are speculators with no intention of ever receiving delivery of the commodities they are trading.

• the bulk of firms trading on futures exchanges are speculators with no intention of ever receiving delivery of the commodities they are trading.
• the volume of wheat contracts from the beginning of the year through March 2008 was 5.7 million contracts.
• THE PRICE of futures contracts is affected to some degree by prices in the present.
• if futures prices are going up and a gap develops with current spot market prices, this could lead buyers of commodities to hoard in the present
• rising prices in either the spot market or the futures market could end up reinforcing each other and further exacerbate inflation.

• All other things being equal, the prices of expiring futures contracts should converge with the pricing on spot markets on the date of expiration--that is, the price of oil in June should be pretty close to the price of oil futures contracts trading today that expire in June. But there are huge divergences developing.

  
  

  Why? Because there are too many investors chasing too few futures contracts, and this is creating demand for the underlying commodity that drives up the price of the commodity to be delivered in the future.

• All other things being equal, the prices of expiring futures contracts should converge with the pricing on spot markets on the date of expiration--that is, the price of oil in June should be pretty close to the price of oil futures contracts trading today that expire in June. But there are huge divergences developing.
• Why? Because there are too many investors chasing too few futures contracts, and this is creating demand for the underlying commodity that drives up the price of the commodity to be delivered in the future.
• grain futures contracts for some have become investment securities--not hedging instruments that offset either cash inventories or future usage