What is a futures contract?
Futures contract
From Wikipedia, the free encyclopedia
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality (which, in many cases, may be such non-traditional "commodities" as foreign currencies, commercial or government paper [e.g., bonds], or "baskets" of corporate equity ["stock indices"] or other financial instruments) at a certain date in the future, at a price (the futures price) determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.
A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. In other words, the owner of an options contract may exercise the contract, but both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit.
Futures contracts, or simply futures, (but not future or future contract) are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement.[1]
http://en.wikipedia.org/wiki/Futures_contract
What are exchange traded derivatives?
Derivative (finance)
From Wikipedia, the free encyclopedia
Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.
The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs. Credit derivatives have become an increasingly large part of the derivative market.
Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)[1]. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty's solvency and ability to honor its obligations.
Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.
http://en.wikipedia.org/wiki/Derivative_(finance)#Exchange_traded_derivatives
Great questions! What have we learned? In a nutshell, futures contracts are exchange traded derivatives. The key word being "derivatives". Traders on Wall Street are running as fast as they can from "derivatives". One is then lead to wonder if the crash in "paper" Gold and Silver prices on the CRIMEX has been caused by one of two overlapping scenarios: Da Rat Bastids are fleeing a sinking ship coupled with a "buyers boycott" of paper Gold and Silver. Selling into a market with no buyers will always result in a crash. Derivatives are blowing up all over Wall Street. Why risk buying a Gold "derivative" that could be at the risk of default, if you can buy the real thing? Seems too simple, but it's a thought anyways...
Perhaps it is "just" deleveraging by the hedge funds and the like, but it just seems odd to me that prior to the Bear Stearns Bailout in March, going long Gold in the futures market was a no brainer. And then the shit hits the fan...and suddenly being long Gold futures is a bad idea? But again, derivatives are blowing up all over Wall Street. What sane investor, or speculator for that matter, wants to buy something that could blow up in his face through default? The sane investor has left the futures pit for the real deal, physical bullion. The speculator has been left to unwind his derivatives daisy chain in the hopes that he not only has some cash left to buy physical bullion, but that there is some left to buy once he gets out from under the paper pile at the CRIMEX.
Let's not forget that it takes a huge pile of "credit" to work the futures markets. Margin requirements are small, but somebody has to cover the balance. Last time I checked, the credit markets were a bit tight. Perhaps there is just no money available to buy CRIMEX fuutures contracts.
I'll go out a limb here today and suggest that the CRIMEX will implode somewhere between the beginning of the December contract roll over in mid-November, and First Notice of Delivery intent at the end of the month. The election will be over by then, and with next to no Gold available in the retail market, a raid on the CRIMEX warehouse should occur with those still holding December futures contracts standing for delivery and refusing settlement in cash. Damn, wouldn't that be exciting?!
Let the countdown begin!
Physical Gold vs. Paper Gold
Pete Grant and Jonathan Kosares discuss the falling gold price in the face of a major banking crisis and unprecedented gold demand by investors. Commodity-oriented bank and hedge fund positions have been forced to deleverage and to liquidate profitable positions to raise capital for margin calls and in response to shareholder/fundholder redemptions in a flight to cash. Cash-holders and bond holders, however, will soon realize that the negative yield against higher inflation rates and inevitable currency depreciation will make gold ownership a better alternative as a safe-haven.
http://www.usagold.com/video/20081018.html
Although brief, this is an exceptional discussion of the Gold Bugs topic of the day.
Metal keeps drying up as Comex pretends otherwise
...from Hugo Salinas Price, president of the Mexican Civic Association for Silver, quoted in GATA Chairman Bill Murphy's "Midas" commentary at LeMetropoleCafe.com:
"Mexico's central bank has informed us that as of this morning they will be able to supply us with only 60,000 Libertad silver ounces from here to December.
"Banco Azteca has in stock only 15,000 ounces.
"Banco Azteca has been selling 60,000 ounces a month in August and September.
"How is it possible that a country that is either No. 1 or No. 2 in silver production (Peru sometimes exceeding Mexico) cannot supply silver coin?
"Is there some sort of agreement at a high level to restrict the amount of silver coin that the population can obtain?
"Does this measure go beyond the scarcity of silver at the present 'paper price' of silver, to a deliberate restriction of silver coins to be placed in the hands of the public?
"This restriction on supply on the part of the Banco de Mexico, which mints the Libertad ounce, is disturbing, to say the least."
http://gata.org/node/6798
The Silver Rush Is On
There is no clearer proof of the developing investment rush in silver than by comparing it to gold. Gold is viewed by the world as the king of the precious metals. Gold investment flows are the prime driver for its price. For every silver article written, there are a hundred gold articles written. For every silver investor, there are a hundred gold investors. Gold and gold investment are very big businesses. Silver is tiny in comparison.
In the current time of financial crisis, gold has experienced a surge in investment buying of all types. The amount of gold held in publicly-owned ETFs, closed-end funds and other deposit programs is at records. In addition, for the first time in memory, retail physical gold coins and bars are very hard to get and command premiums. This is unusual, and confirms strong investment demand for gold.
Yet, compared to silver, the surge in investment demand for gold seems tame. based upon the facts. The price of gold is currently more than 80 times the price of silver, one of the biggest differences in history. Secondly, since there is 4 to 5 times more gold in the world than silver (4 to 5 billion gold ounces vs. 1 billion silver ounces), that means that the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5). The value of all the gold in the world is $4 trillion (4000 billion). The value of all the silver is $10 billion.
Give the fact that the dollar value of all the gold in the world is up to 400 times greater than the value of all the silver in the world, let me ask you a question. How much more investment money is flowing into gold, compared to silver? Your answer should be 80 times more, or 300 to 400 times more. That would be logical and intuitive. Yet, that answer would not even be close. Over the past ten months, the dollar value of documented investment flows into gold (all ETFs and public funds, plus new retail coin and bar demand) was $8.5 billion (10 million ounces x $850 average price). In silver, the equivalent dollar amount was $2.5 billion (150 million ounces x $16.5 average price). So, instead of gold investment flows being 80, or 300 or 400 times greater than investment flows into silver, they were less than 4 times greater. And on specific apples-to-apples comparisons, the match ups are even more dramatic. For example, in the issuance of Eagle bullion coins by the U.S. Mint, less than 2 times as much money went into gold Eagle coins as into silver Eagle coins.
This proves, beyond a doubt, that an unprecedented investment rush is underway in silver. The amount of investment money flowing into silver, compared to gold, is staggering. Let me make this clear - it’s not bearish for gold in any way. It’s just bullish beyond belief for silver.
http://news.silverseek.com/TedButler/1224532979.php
Damning Paulson and Bernanke: 'Grotesquely Conflicted' and 'Most Lenient'
The Treasury secretary is "grotesquely conflicted" in his efforts to bail out his former employer, as detailed here, and has found "common cause" with an overly lenient Fed chairman.
"They have a bias to preserve the derivatives market" -- the riskiest part of Wall Street, Whalen says, noting the government let Lehman and Bear fail but bailed out AIG and (according to Whalen) rescued Goldman Sachs and Morgan -- at least for the time being.
http://finance.yahoo.com/tech-ticker/article/98300/Damning-Paulson-and-Bernanke-
Listen closely to what this man has to say in this interview video. Paulson and Bernanke are determined to bailout the banks that created this toxic mess, and let the banks that create capital perish. Paulson and Bernake should both be shot for treason.
Dollar lifted by rush to safety
"Ongoing and again today, it was obvious ... you had a strong force towards market participants wanting to be in a liquid, safe asset, and that's the dollar," said Benedikt Germanier, senior foreign exchange strategist for UBS AG in Stamford, Conn.
The Federal Reserve introduced a new program, worth up to $540 billion, Tuesday to finance the buying of assets from money market mutual funds in another effort to get credit flowing freely.
http://money.cnn.com/2008/10/21/news/dollar_euro.ap/index.htm?postversion=2008102112
Only one word will suffice as comment on this story: BULLSHIT!
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