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22 lines
2.0 KiB
Plaintext
446A COMpLete guide tO tHe Futures MArKet
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■ The Limited-Risk Spread
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the limited-risk spread is a type of intracommodity spread involving the buying of a near month
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(relatively speaking) and the selling of a more distant month in a storable commodity in which the
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process of taking delivery, storing, and redelivering at a later date does not require reinspection or
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involve major transportation or storage complications. this defi nition would exclude such commodi-
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ties as live cattle, which by defi nition are nonstorable, and sugar, which involves major complications
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in taking delivery and storing. Commodities that fall into the limited-risk category include corn,
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wheat, oats, soybeans, soybean oil, copper, cotton, orange juice, cocoa, and lumber.
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2
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in a commodity fulfi lling the above specifi cations, the maximum premium that a more distant
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month can command over a nearby contract is roughly equal to the cost of taking delivery, holding
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the commodity for the length of time between the two expirations, and then redelivering. the cost
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for this entire operation is referred to as full carry. the term limited risk will be used only when the
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nearby month is at a discount. For example, assuming full carry in the October/december cotton
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FIGURE 30.1 July and december 2015 Coff ee Futures vs. July/december 2015 Coff ee spread
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Chart created using tradestation. ©tradestation t echnologies, inc. All rights reserved.
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2 Although precious metals can easily be received in delivery, stored, and redelivered, they are not listed here
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because spreads in precious metals are almost entirely determined by carrying charges. thus, the only motivation
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for implementing an intramarket precious metals spread is an expectation for a change in carrying charges. in
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contrast, the purpose of a limited-risk spread is to profi t from an expected narrowing of the spread relative to
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the level implied by carrying charges (which are assumed to remain constant). |