Stuck in understanding futures vs cash markets.... Help :)

[murray t turtle]

So, watching cash & futures markets [prices]may help... taking delivery of all that silver was not the problem. It was the Bunker Hunt insane leverage.

CFTC, CBOT, COMEX all, i think ,were actually trying to help Bunker Hunt setltle out of [bankrupcy ]court So the system worked real well[not the insane leverage part].LOLin this case.

I dont think specs should be able to futures speculate in oil or gasoline;
they simply jack the price up. [If long specs didnt help jack the price UP, they would never make a profit.] Oil & gasoline are much more of a necessity than silver . Silver is mostly a luxury, inflation hedge, investment & by products of gold & copper mines.

 

[capitalistsmith]

Quote from murray t turtle:

So, watching cash & futures markets [prices]may help... taking delivery of all that silver was not the problem. It was the Bunker Hunt insane leverage.

CFTC, CBOT, COMEX all, i think ,were actually trying to help Bunker Hunt setltle out of [bankrupcy ]court So the system worked real well[not the insane leverage part].LOLin this case.

I dont think specs should be able to futures speculate in oil or gasoline;
they simply jack the price up. [If long specs didnt help jack the price UP, they would never make a profit.] Oil & gasoline are much more of a necessity than silver . Silver is mostly a luxury, inflation hedge, investment & by products of gold & copper mines.

Im not entirely sure how to use this example in connection to my OP?

I understand that they tried to `corner the market` and they technically speaking, artificially pumped up the price of silver more than its actually worth....

But when you mention this Arab fund (?) buying silver aswell, what does this have to do with the relationship between futures and cash market....?

Sorry, i`m just a little confused, you`re more than welcome (if you have the time) to use analogies!

 

[ForAPlus]

A futures transaction is (for the most part, see [*] below) a cash transaction with payment post dated at some point in the future (at the expiration). It surprises most people when they first learn about futures that, because of the foregoing, future prices do not include expectation of prices in the future.

[*] some futures, such as US treasury notes, have some special delivery properties that make them a little odd compared to, say, wheat or live cattle.

Quote from capitalistsmith:

Im not entirely sure how to use this example in connection to my OP?

I understand that they tried to `corner the market` and they technically speaking, artificially pumped up the price of silver more than its actually worth....

But when you mention this Arab fund (?) buying silver aswell, what does this have to do with the relationship between futures and cash market....?

Sorry, i`m just a little confused, you`re more than welcome (if you have the time) to use analogies!

 

[oldtime]

the big hedgers, Cargill, General Mills, Pillsbury, Russia need wheat by a date certain

That wheat it still in the ground

If they like the price, they will buy it in the futures mkt

If it goes up, they are hedged

if it goes down, they would have done better waiting, but that is not a risk they are willing to take, since they might be risking the profits and future of the whole company or starvation of the people.

they will buy in the cash market when the time comes, and by then their futures contracts will be offset

In laymens terms hedgers are big and slow, the speculators try to be small and quick

without futures, everybody would be forced to buy at the current cash price, and that makes it impossibe to predict the future profits

same for the farmer out in the field, once he sells on the futures mkt, he knows what his price per bushel will be and can start making other decisions for new equipment, more land, different plantings. If he waits until harvest and takes his chances in the now flooded cash market, anytime all summer you ask him a question the answer will always be, "I don't know, we'll just have to see how it goes."

 

[oldtime]

the speculator really just functions as an insurance company for the hedgers

they are worried it might never rain again, and for a price, I will insure them against that unlikely possibility

 

[oldtime]

Quote from oldtime:

the speculator really just functions as an insurance company for the hedgers

they are worried it might never rain again, and for a price, I will insure them against that unlikely possibility

and that's exactly how I blew up my first trading account

 

[capitalistsmith]

Quote from oldtime:

the big hedgers, Cargill, General Mills, Pillsbury, Russia need wheat by a date certain

That wheat it still in the ground

If they like the price, they will buy it in the futures mkt

If it goes up, they are hedged

if it goes down, they would have done better waiting, but that is not a risk they are willing to take, since they might be risking the profits and future of the whole company or starvation of the people.

they will buy in the cash market when the time comes, and by then their futures contracts will be offset

In laymens terms hedgers are big and slow, the speculators try to be small and quick

without futures, everybody would be forced to buy at the current cash price, and that makes it impossibe to predict the future profits

same for the farmer out in the field, once he sells on the futures mkt, he knows what his price per bushel will be and can start making other decisions for new equipment, more land, different plantings. If he waits until harvest and takes his chances in the now flooded cash market, anytime all summer you ask him a question the answer will always be, "I don't know, we'll just have to see how it goes."

Thank you very much. You pretty much nailed my question to a T.

Appreciate it! Sometimes keeping it simple allows me to allow my logic to unfold in a real world scenario.

One last thing, when you mean "Offset" in the cash market, will the `farmer` offset his futures contract in Wheat on the day of expiry and then purchase the FULL contract which costs more for the 5,000 bushels?

Also why do futures contracts expire? Is this related to seasons?

 

[oldtime]

Quote from capitalistsmith:

Thank you very much. You pretty much nailed my question to a T.

Appreciate it! Sometimes keeping it simple allows me to allow my logic to unfold in a real world scenario.

One last thing, when you mean "Offset" in the cash market, will the `farmer` offset his futures contract in Wheat on the day of expiry and then purchase the FULL contract which costs more for the 5,000 bushels?

Also why do futures contracts expire? Is this related to seasons?

yes, when the famer sells his wheat in the cash market, he will also buy back in the futures market

keep in mind the futures contract is a contract to take delivery, so when you buy you are promising to take delivery on the expiration date

in ags there is something called "old crop" which is already in the bins and "New Crop" which is still in the field

but no, S&P futures really don't have seasons

 

[capitalistsmith]

Quote from oldtime:

yes, when the famer sells his wheat in the cash market, he will also buy back in the futures market

keep in mind the futures contract is a contract to take delivery, so when you buy you are promising to take delivery on the expiration date

in ags there is something called "old crop" which is already in the bins and "New Crop" which is still in the field

but no, S&P futures really don't have seasons

Ok so how does the Farmer become eligible to sell his stock on the cash commodity?

Just by size of goods?


Can the farmer GAURANTEE that there will be a buyer of his goods ....? Traders are constantly buying and selling there contracts to only liquidate it on expiry with no intention of purchasing the goods?

What do you mean he will sell his stock in the cash market and buy it back on the futures?


Sorry if im not keeping up, thanks for explaining this to me!

 

[oldtime]

Quote from capitalistsmith:

Ok so how does the Farmer become eligible to sell his stock on the cash commodity?

Just by size of goods?


Can the farmer GAURANTEE that there will be a buyer of his goods ....? Traders are constantly buying and selling there contracts to only liquidate it on expiry with no intention of purchasing the goods?

What do you mean he will sell his stock in the cash market and buy it back on the futures?


Sorry if im not keeping up, thanks for explaining this to me!

at harvest time he has real wheat which he sells in the cash market, then he buys back his short futures contracts, but if there was nobody to buy from, he could just deliver his real wheat to satisfy his obligation, because when he sold the futures and when you do too, you are promising to deliver.