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Futures & Commodities

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Futures & Commodities Summary

Futures are standardized forward contracts traded on an exchange. Forward contracts set the price for a good exchanged in the future today. Forwards are typically customized over the counter vehicles, which have their expiration and unit size modified for the buyer or seller of the contract. Customized forward contracts typically last a long time, while futures are traded in standardized durations according to an exchange’s regulations.

Commodities are the hard assets that are mined, drilled, drained, picked, pumped, plucked, or cut down. They’re the base raw materials that create all of the goods used in construction, fashion, automotive, digital, and other product categories. They all have several unique properties in common. All commodities can be stored, for at least a small period of time. All commodities can be traded; though transporting them varies in difficulty. Lastly, all commodities are interchangeable, but substituting them may result in quality differences. These differences may be reduced or enhanced by refinement and other developments.

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Forwards & Futures

Futures are standardized forward contracts traded over an exchange. Forward contracts are derivatives which set the price for a commodity or asset exchanged in the future today. Forwards are typically customized over the counter vehicles, which have their expiration and unit size modified for the buyer or seller of the contract. Customized forward contracts typically last a long time, while futures are traded in standardized duration according to the exchange’s regulations. 

Forwards & Futures Basics

Forwards & Futures Basics

Futures are standardized forward contracts traded over an exchange. Forward contracts are derivatives which set the price for a commodity or asset exchanged in the future today. Forwards are typically customized over the counter vehicles, which have their expiration and unit size modified for the buyer or seller of the contract. Customized forward contracts typically last a long time, while futures are traded in standardized duration according to the exchange’s regulations.

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Futures Market Divisions

Futures Market Divisions

Futures contracts divide into two general underlying asset categories: commodities and financials. Each category splits into separate individual asset subcategories. Commodities are bulk physical assets. Financial futures are based on underlying assets trading in the marketplace. Currency futures are based on monetary denominations of various nations, and the trade which connects them. Futures contracts are used to secure future prices in advance. Contracts also secure the quality of an asset to be delivered if they have discernible quality grades. Physical contracts are often defined in grades, such as differing strains of foods or differing production qualities.

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Future Returns

Future Returns

Futures performance has multiple subcategories of returns that combine to create the total return. Each mechanism functions slightly differently. They also come in a specific order. The spot return comes first, collateral return second, and roll return third. These combine to form your total return in the futures market.

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Futures Margin

Futures Margin

Future trading is heavily based on margin. The deposit, kept with your Future Commission Merchant, is known as the initial margin. Ultimately, the futures exchange’s clearinghouse keeps and records your balance, and ensures you stay above a specified amount. The minimum margin level is set by the clearinghouse, regulators, and brokerages. Any of these parties can increase the total requirement. Investors will have to add more funds if they fall below the minimum margin level.

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Futures Hedgers and Speculators

Futures Hedgers and Speculators

Futures do not provide any of the benefits of the underlying financial instrument. Any benefit of asset ownership is eliminated. This includes control, dividends, residual payments, and interest payments. The only two reasons for trade are hedging and speculative profit.

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Commodities

Commodities are hard assets that are mined, drilled, drained, picked, plucked, or cut down. They’re the base raw materials that create all of the goods used in construction, fashion, automobile, digital, and other product categories. They all have several unique properties in common. All commodities can be stored, for at least a small period of time. All commodities can be traded; though transporting them varies in difficulty. Lastly, all commodities are interchangeable, but substituting them may result in slight quality differences. 

Commodity Basics

Commodity Basics

Commodities are the hard assets that are mined, drilled, drained, picked, plucked, or cut down. They’re the base raw materials that create all of the goods used in construction, fashion, automotive, digital, and other product categories. They all have several unique properties in common. All commodities can be stored, for at least a small period of time. All commodities can be traded; though transporting them varies in difficulty. Lastly, all commodities are interchangeable and have alternatives, but substituting them may result in slight quality differences. These differences may be reduced or enhanced by refinement and other developments.

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Demand & Commodities

Demand & Commodities

To understand how a specific commodity interacts with economic demand and marketplace prices, you need to understand how economics defines demand. Demand falls into two economic categories. Goods can either be elastic or inelastic. The categorization is based on the interactions of demand, supply and price.

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Commodity Risks

Commodity Risks

Commodities are used to diversify the source of your returns. Commodity markets have different economic reactions in comparison to equity markets. They are often inversely affected by issues which hurt other investments like Inflation, Event Risk, and Geopolitical Risk. This gives commodities a “negative correlation” to those investment classes.

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Valuing Commodities

Valuing Commodities

Commodities acquire their value from the current market price, and their expected demand in the future. The expected demand spurs purchases or sales, which results in price changes in the present. When investors expect prices to rise in the near future, they invest in commodities, raising prices. When they expect prices to fall, they sell their commodities, lowering prices.

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Commodity Investment Vehicles

Commodity Investment Vehicles

There are several ways you can actually invest in commodities. You can enter commodity positions through Direct Purchases, Equities, Funds, and Futures. Each way has its own benefits and its own downsides. Look at your entire portfolio and ensure that you are not magnifying losses that would occur from a singular adverse incident. The sources of both profits and risks should be diversified.

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Futures Trading

The mechanisms behind futures trading may seem complicated in advance, but they’re fairly simple in practice. Futures contracts inform you of all of their expectations. These expectations have been standardized by the futures market to decrease trading difficulty and increase liquidity. The price information for futures changes constantly during the day according to supply and demand. Investors who receive this information quickly have an edge of those who are slow to receive accurate price updates. In order to actually trade on an exchange, you must submit specific orders that inform your broker how trades should be executed.

Futures Trading Basics

Futures Trading Basics

The mechanisms behind futures trading may seem complicated in advance, but they’re fairly simple in practice. You can purchase and sell futures through a broker licensed by National Futures Association within the United States. The broker is known as a Futures Commission Merchant, and they will execute orders given by you on an exchange.

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Futures Contract Details

Futures Contract Details

A futures contract informs you of all of their expectations. These expectations have been standardized by the futures market to decrease trading difficulty and increase liquidity. Forwards contracts which are not standardized can be customized from OTC dealers, usually corporations and companies trying to hedge in either long or short positions. Note that this list is in alphabetical order. This list does not include all the potential aspects of a futures contract, only the major focus points.

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Futures Quote Charts

Futures Quote Charts

Futures pricing is fairly simple but seems complicated. The price information for futures changes constantly during the day according to supply and demand. Investors who quickly receive this information have an edge of those who are slow to obtain accurate price updates. Many pay substantial amounts of money to receive information even milliseconds faster than other traders in the market.

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Commodity Trading Orders

Commodity Trading Orders

In order to actually trade on an exchange, you must submit specific orders that inform your broker how trades should be executed. You need to plan your trades in advance. Begin by deciding the underlying asset or commodity you’re trading and the trading position. You’ll also need the amount of contracts and the length of time until the delivery date. You have two major time options to choose between executing for orders: Day orders and Open orders. Day orders expire at the end of the day, while open orders remain open until the trade is completed or canceled. An open order may also be called “Good Till Canceled”, but can only be canceled at the directive of the person who ordered.

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Clearance & Settlement

Clearance & Settlement

The clearance and settlement process for futures trading is slightly different compared to other investment markets if trading on an exchange. Parties to a futures contract have no responsibility to each other after the future is initially traded. The exchange itself will step into both sides of the transaction, becoming the counterparty for both parties. The exchange buys from the seller and sells to the buyer. This eliminates any obligational risk on both sides of the transaction. Their duty to one party is canceled by another.

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Futures Delivery

Futures Delivery

Transfer of a future’s underlying asset is required to complete contractual obligations. Physical commodities require delivery of the actual asset. Financial assets require digital delivery or wire transfer. Another option is the delivery of currency called cash settlement. The receiver will acquire the value of the underlying asset and not the asset itself. For online or retail traders, this typically occurs via assistance from the brokerage.

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Futures

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

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American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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