37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
656 Part V: Index Options and Futures
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gains and losses are taken into account as well as are realized ones. If his account
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loses money, he must add cash into the account or sell out some of his Treasury bills
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in order to cover the loss, on a daily basis. However, if he makes money, that unreal
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ized profit is available to be withdrawn or used for another investment.
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Example: The cotton speculator from the previous example sees the price of the
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March cotton futures contract he owns fall from 60.00 to 59.20 on the first day he
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owns it. This means there is a $400 unrealized loss in his account, since his holding
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went down in price by 0.80 cents and a one-cent move is worth $500. He must add
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$400 to his account, or sell out $400 worth of T-bills.
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The next day, rumors of a drought in the growing areas send cotton prices much
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higher. The March future closes at 60.90, up 1.70 from the previous day's close. That
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represents a gain of $850 on the day. The entire $850 could be withdrawn, or used as
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initial margin for another futures contract, or transferred to one's stock market
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account to be used to purchase another investment there.
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Without speculators, a futures contract would not be successful, for the specu
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lators provide liquidity. Volatility attracts speculators. If the contract is not trading
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and open interest is small, the contract may be delisted. The various futures
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exchanges can delist futures just as stocks can be delisted by the New York Stock
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Exchange. However, when stocks are delisted, they merely trade over-the-counter,
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since the corporation itself still exists. When futures are delisted, they disappear -
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there is no over-the-counter futures market. Futures exchanges are generally more
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aggressive in listing new products, and delisting them if necessary, than are stock
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exchanges.
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TERMS
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Futures contracts have certain standardized terms associated with them. However,
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trading in each separate commodity is like trading an entirely different product. The
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standardized terms for soybeans are completely different from those for cocoa, for
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example, as might well be expected. The size of the contract (50,000 pounds in the
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cotton example) is often based on the historical size of a commodity delivered to
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market; at other times it is merely a contrived number ($100,000 face amount of U.S.
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Treasury bonds, for example).
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Also, futures contracts have expiration dates. For some commodities (for exam
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ple, crude oil and its products, heating oil and unleaded gasoline), there is a futures
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contract for every month of the year. Other commodities may have expirations in only
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5 or 6 calendar months of the year. These items are listed along with the quotes in a
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good financial newspaper, so they are not difficult to discover. |