43 lines
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Plaintext
43 lines
3.0 KiB
Plaintext
442
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A Complete Guide to the Futures mArket
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commodity is too high or low relative to a closely related commodity. some examples of this
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type of spread include long december cattle/short december hogs and long July wheat/short
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July corn. The source/product spread, which involves a commodity and its by-product(s)—for
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example, soybeans versus soybean meal and/or soybean oil—is a specific type of intercommod-
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ity spread that is sometimes classified separately.
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usually, an intercommodity spread will involve the same month in each commodity, but
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this need not always be the case. ideally, traders should choose the month they consider the
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strongest in the market they are buying and the month they consider the weakest in the market
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they are selling. Obviously, these will not always be the same month. For example, assume the
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following price configuration:
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December February april
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Cattle 120.00 116.00 118.00
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Hogs 84.00 81.00 81.00
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given this price structure, a trader might decide the premium of cattle to hogs is too small
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and will likely increase. this trading bias would dictate the initiation of a long cattle/short hog
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spread. However, the trader may also believe February cattle is underpriced relative to other
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cattle months and that december hogs are overpriced relative to the other hog contracts. in
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such a case, it would make more sense for the trader to be long February cattle/short decem-
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ber hogs rather than long december cattle/short december hogs or long February cattle/short
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February hogs.
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One important factor to keep in mind when trading intercommodity spreads is that contract
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sizes may differ for each commodity. For example, the contract size for euro futures is 125,000
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units, whereas the contract size for British pound futures is 62,500 units.
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thus, a euro/British
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pound spread consisting of one long contract could vary even if the price difference between
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the two markets remained unchanged.
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the difference in price levels is another important fac-
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tor relevant to contract ratios for intercommodity spreads. the criteria and methodology for
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determining appropriate contract ratios for intercommodity spreads are discussed in the next
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chapter.
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3. the intermarket spread. this spread involves buying a commodity at one exchange and sell-
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ing the same commodity at another exchange, which will often be another country. An example
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of this type of spread would be long
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new Y ork March cocoa/short London March cocoa. trans-
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portation, grades deliverable, distribution of supply (total and deliverable) relative to location,
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and historical and seasonal basis relationships are the primary considerations in this type of
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spread.
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in the case of intermarket spreads involving different countries, currency fluctuations
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become a major consideration. intermarket spread trading is often referred to as arbitrage. As
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a rule, the intermarket spread requires a greater degree of sophistication and comprehensive
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familiarity with the commodity in question than other types of spreads. |