On some commodity trades, especially metals such as Cu, Al, and Pb, a price is quoted as a cash or 3 month price. What does this mean?
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On some commodity trades, especially metals such as Cu, Al, and Pb, a price is quoted as a cash or 3 month price. What does this mean?
I believe the price can be modified if the value of the metal changes drastically during these three months.. Believe I've read that somewhere.
Yep, this is commonly known as "futures". You buy a product (or share) in advance, and pay an agreed price.
If the market suddenly rises or falls (as it tends to in those areas apparently) then you make a profit/loss according to the rate of change between the agreed price and the price you sell at.
If you get your predictions of the market right you can make big money, but if you get them wrong you can lose big time too.
So if the 3mo price is £3,000 that's the settlement agreement for the next three months?
Can it be assumed then that if we have a bull price and the ratio between the cash, and the 3mo is (in percentage wise) negligable, that the market feels that the cash price is going to hold?
I'm not sure on the specifics, as I've only done a bit of theory... but I would assume that £3000 is the price you buy at (now), and then get to sell it in 3 months time (or sooner if you can find someone who wants to buy a "shorter future").
I'd guess so, either that or they are expecting a drop slightly (as I'd assume that there is a percentage reduction for buying in advance).Quote:
Can it be assumed then that if we have a bull price and the ratio between the cash, and the 3mo is (in percentage wise) negligable, that the market feels that the cash price is going to hold?
Technically you are not buying it in advance. A future is an agreement between two parties to buy/sell at a specified price at a specified date.Quote:
Originally Posted by si_the_geek
. . . which is 3 months into the future?Quote:
Originally Posted by grilkip
. . . Depends on the future and when you buy it...Quote:
Originally Posted by yrwyddfa
OK So let's say there's a £3k Cu cash price, and a £2.8k 3mo futures price. What does this actually mean in a temporal way. When can I get my hands on Cu at £2.8k and when can I sell it.Quote:
Originally Posted by grilkip
Look at a future as an insurance, a company that consumes great amounts of some commodity will buy a future to ensure that they know the price they will be buying at on a given date.Quote:
Originally Posted by yrwyddfa
Futures themselves can be traded as well, if the underlying commodity price changes the value of such a future (taking in mind the expiration, as a future that lasts longer has more potential to change and is thusly more expensive) it can be lucrative (or stoploss!) to trade them. A lot more dangerous than options though, as the potential of loss is limitless.
You can agree to buy Cu now for £3k. You will then be the owner of an amount of Cu that currently is trading for £3k. Somebody else thinks that in 3 months time, that Cu will be worth less than £2.8k, so he's offering it for that price then, but you make the contract now. If you think it's going to be worth more than £2.8k, it's a good deal for you. If you don't, then you're agreeing with him, so you won't want to tie yourself into buying the Cu in 3 months time at £2.8k.
However, if you can find a mug who believes that it's going to be worth more than £3k, you can buy it yourself now at £2.8k and then sell it to him immediately (now) for £3k. He thinks he's getting a good deal, cos he believes the price is going to be over £3k, and you're guaranteed some dosh because effectively you're taking a cut of a transaction between the guy who sold it to you and the guy who's buying it from you.
If it ends up worth less than £2.8k, then it's the end buyer who loses out. If it ends up worth more, then you don't make as much as you would have done if you'd held onto it, but either way you make money.
So effectively, these big chains build up until either somebody doesn't want to hedge their bets any more or they can't find a buyer at the price it would take to make it worth their while to sell.
Does that make sense?
zaza
To paraphrase then . . . .
I see Cu today trading at $8619 for cash, but trading at $8475 for 3 months. If I go for the 3mo then I will liable to cough up the $8475 as agreed in 3 months time.
If,say, the cash price is, in three months time, then $9000 I can then sell it on for the going cash rate and I'm quids in. If it falls I own copper that is worth less than what I paid for it.
I can also buy a 'futures contract' and trade that. I can tell people 'Look I have this contract that clearly is going to make me a lot of money - does anyone want to buy it?'
If what I've said is accurate, I can then presume that the 3mo price might indeed be an accurate indicator of what traders expect Cu to do. In this case the Cu trader would expect the Cu to devalue. If I expect it to be bullish then I should buy the 3 mo price
How accurate is that lot?
Sure,
If you are bullish, buy that future. If bearish, then sell/write that future.
Ofcourse everybody down the line takes their margin, so don't count yourself rich yet!
Sounds more or less right.
Thanks chaps for your help; most appreciated :thumb:
Take in mind that the execution of futures is done by exchanging money, not with the actual commodity. You can make a killer fortune or loss with futures without ever seeing or moving any Cu. It is an agreement to a price at a time and there is a large trading industry between the producers and the buyers.
I find options more interesting, you can make all kinds of combinations with CALL/PUT/WRITE to suit your predictions.
A 5 finger discount... out where I live anyways. :bigyello::thumb:Quote:
Originally Posted by yrwyddfa
I'd buy a PUT option on JR at any price :D
At least I don't have to buy a GET option at all. It's free! :p