AREC 384 futures market

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

• delivery
• cash settlement
• trade the contract (offsetting or lifting the hedge)

• = cash price - (nearby) futures price
• usually more predictable than cash or futures prices

cash price > futures price

cash price < futures price

• 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