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Futures basics
When explaining about futures, people often give the example of sugar futures where instead of waiting the contract due and receive a truckload of sugar, people sell the contract for a profit.
My rookie question is, what happens to the last guy holding the contract? Does he really receive the underlying commodity which is this case, sugar?
Answers
957 points
CUWu answered one year ago …
I believe that at some point you could take delivery of the underlying commodity, but if you work through a commodities trading broker what they'll usually do is just roll your contract over into the following month.
Here's an article on Minyanville.com about it:
http://www.minyanville.com/articles/crude-wheat-treasuries-inflation/index/a/16055
3963 points
MNSL answered one year ago …
In futures market traders always try to avoid physical trading. As you said they prefer to pass contract one person to another. Only a few contracts are exercising in the futures markets. By using futures contacts some traders have cornered the market in the past. By doing this they had created shortage in the market and artificial demand for product to maximize profits by disposing their futures contract.
A futures contract is a derivative and .Even if a specific commodity's price crashes or increases someone is going to be making money. For every dollar made, there is a dollar lost.
If I think corn is going to become worthless, I buy short corn contracts, and when the price drops down, I make a lot of money. If I think the price of corn is going to quadruple, I buy long contracts, and when it does, I get rich.
Accordign to http://en.wikipedia.org/wiki/Futures_contract
The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). The Nymex crude futures contract uses this method of settlement upon expiration.
