Spot and futures prices relationship advice

Why do futures prices converge on spot prices during the delivery month? further highlights the relationship, and ultimate correlation, between the spot market in this article are those of Craig Roberts and is not intended as general advice. Trading has also been initiated in options on futures contracts, enabling option That is a decision you should make only after consultation with your broker or Eventually, contracts were entered into for forward as well as for spot .. in the relationship between the purchase price of one and the selling price of the other. We would like to thank our supervisor Francisco Santos, for giving us advice on the Using weekly observations of spot and futures prices with 1- to months to whether or not futures prices are leading the price discovery relationship.

Still others purchase an interest in a commodity trading pool. There's no formula for deciding. Your decision should, however, take into account such things as your knowledge of and any previous experience in futures trading, how much time and attention you are able to devote to trading, the amount of capital you can afford to commit to futures, and, by no means least, your individual temperament and tolerance for risk. The latter is important.

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Some individuals thrive on being directly involved in the fast pace of futures trading, others are unable, reluctant, or lack the time to make the immediate decisions that are frequently required. Some recognize and accept the fact that futures trading all but inevitably involves having some losing trades.

Others lack the necessary disposition or discipline to acknowledge that they were wrong on this particular occasion and liquidate the position. Many experienced traders thus suggest that, of all the things you need to know before trading in futures contracts, one of the most important is to know yourself.

This can help you make the right decision about whether to participate at all and, if so, in what way. In no event, it bears repeating, should you participate in futures trading unless the capital you would commit its risk capital. That is, capital which, in pursuit of larger profits, you can afford to lose. It should be capital over and above that needed for necessities, emergencies, savings and achieving your long-term investment objectives.

You should also understand that, because of the leverage involved in futures, the profit and loss fluctuations may be wider than in most types of investment activity and you may be required to cover deficiencies due to losses over and above what you had expected to commit to futures. Trade Your Own Account This involves opening your individual trading account and--with or without the recommendations of the brokerage firm--making your own trading decisions.

You will also be responsible for assuring that adequate funds are on deposit with the brokerage firm for margin purposes, or that such funds are promptly provided as needed.

Practically all of the major brokerage firms you are familiar with, and many you may not be familiar with, have departments or even separate divisions to serve clients who want to allocate some portion of their investment capital to futures trading. Different firms offer different services. Some, for example, have extensive research departments and can provide current information and analysis concerning market developments as well as specific trading suggestions.

Others tailor their services to clients who prefer to make market judgments and arrive at trading decisions on their own. Still others offer various combinations of these and other services. An individual trading account can be opened either directly with a Futures Commission Merchant or indirectly through an Introducing Broker. Whichever course you choose, the account itself will be carried by a Futures Commission Merchant, as will your money.

Introducing Brokers do not accept or handle customer funds but most offer a variety of trading-related services. Futures Commission Merchants are required to maintain the funds and property of their customers in segregated accounts, separate from the firm's own money.

Along with the particular services a firm provides, discuss the commissions and trading costs that will be involved.

And, as mentioned, clearly understand how the firm requires that any margin calls be met. The major difference is that you give someone rise--an account manager--written power of attorney to make and execute decisions about what and when to trade.

He or she will have discretionary authority to buy or sell for your account or will contact you for approval to make trades he or she suggests. You, of course, remain fully responsible for any losses which may be incurred and, as necessary, for meeting margin calls, including making up any deficiencies that exceed your margin deposits.

Although an account manager is likely to be managing the accounts of other persons at the same time, there is no sharing of gains or losses of other customers. Trading gains or losses in your account will result solely from trades which were made for your account. In most instances, the amount of money needed to open a managed account is larger than the amount required to establish an account you intend to trade yourself. Different firms and account managers, however, have different requirements and the range can be quite wide.

Be certain to read and understand all of the literature and agreements you receive from the broker. Some account managers have their own trading approaches and accept only clients to whom that approach is acceptable. Others tailor their trading to a client's objectives. In either case, obtain enough information and ask enough questions to assure yourself that your money will be managed in a way that's consistent with your goals. These charges are required to be fully disclosed in advance.

Make sure you know about every charge to be made to your account and what each charge is for. While there can be no assurance that past performance will be indicative of future performance, it can be useful to inquire about the track record of an account manager you are considering.

Account managers associated with a Futures Commission Merchant or Introducing Broker must generally meet certain experience requirements if the account is to be traded on a discretionary basis. Finally, take note of whether the account management agreement includes a provision to automatically liquidate positions and close out the account if and when losses exceed a certain amount.

And, of course, you should know and agree on what will be done with profits, and what, if any, restrictions apply to withdrawals from the account. Use a Commodity Trading Advisor As the term implies, a Commodity Trading Advisor is an individual or firm that, for a fee, provides advice on commodity trading, including specific trading recommendations such as when to establish a particular long or short position and when to liquidate that position.

Generally, to help you choose trading strategies that match your trading objectives, advisors offer analyses and judgments as to the prospective rewards and risks of the trades they suggest. Trading recommendations may be communicated by phone, wire or mail.

Some offer the opportunity for you to phone when you have questions and some provide a frequently updated hotline you can call for a recording of current information and trading advice. Even though you may trade on the basis of an advisor's recommendations, you will need to open your own account with, and send your margin payments directly to, a Futures Commission Merchant.

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Commodity Trading Advisors cannot accept or handle their customers funds unless they are also registered as Futures Commission Merchants. Some Commodity Trading Advisors offer managed accounts. The account itself, however, must still be with a Futures Commission Merchant and in your name, with the advisor designated in writing to make and execute trading decisions on a discretionary basis.

Read it carefully and ask the Commodity Trading Advisor to explain any points you don't understand. If your money is important to you, so is the information contained in the Disclosure Document! The prospectus-like document contains information about the advisor, his experience and, by no means least, his current and any previous performance records. If you use an advisor to manage your account, he must first obtain a signed acknowledgment from you that you have received and understood the Disclosure Document.

As in any method of participating in futures trading, discuss and understand the advisor's fee arrangements. And if he will be managing your account, ask the same questions you would ask of any account manager you are considering. You can verify that these requirements have been met by calling NFA toll-free at within Illinois call Participate in Commodity Pool Another alternative method of participating in futures trading is through a commodity pool, which is similar in concept to a common stock mutual fund.

It is the only method of participation in which you will not have your own individual trading account. Instead, your money will be combined with that of other pool participants and, in effect, traded as a single account.

You share in the profits or losses of the pool in proportion to your investment in the pool. One potential advantage is greater diversification of risks than you might obtain if you were to establish your own trading account. Another is that your risk of loss is generally limited to your investment in the pool, because most pools are formed as limited partnerships. And you won't be subject to margin calls. Bear in mind, however, that the risks which a pool incurs in any given futures transaction are no different than the risks incurred by an individual trader.

The pool still trades in futures contracts which are highly leveraged and in markets which can be highly volatile.

Futures Prices Versus Expected Spot Prices

And like an individual trader, the pool can suffer substantial losses as well as realize substantial profits. A major consideration, therefore, is who will be managing the pool in terms of directing its trading. While a pool must execute all of its trades through a brokerage firm which is registered with the CFTC as a Futures Commission Merchant, it may or may not have any other affiliation with the brokerage firm. Some brokerage firms, to serve those customers who prefer to participate in commodity trading through a pool, either operate or have a relationship with one or more commodity trading pools.

Other pools operate independently. A Commodity Pool Operator cannot accept your money until it has provided you with a Disclosure Document that contains information about the pool operator, the pool's principals and any outside persons who will be providing trading advice or making trading decisions.

It must also disclose the previous performance records, if any, of all persons who will be operating or advising the pool lot, if none, a statement to that effect. Disclosure Documents contain important information and should be carefully read before you invest your money.

Another requirement is that the Disclosure Document advise you of the risks involved. In the case of a new pool, there is frequently a provision that the pool will not begin trading until and unless a certain amount of money is raised.

Normally, a time deadline is set and the Commodity Pool Operator is required to state in the Disclosure Document what that deadline is or, if there is none, that the time period for raising, funds is indefinite. Be sure you understand the terms, including how your money will be invested in the meantime, what interest you will earn if anyand how and when your investment will be returned in the event the pool does not commence trading.

Determine whether you will be responsible for any losses in excess of your investment in the pool. If so, this must be indicated prominently at the beginning of the pool's Disclosure Document. Ask about fees and other costs, including what, if any, initial charges will be made against your investment for organizational or administrative expenses. Such information should be noted in the Disclosure Document. You should also determine from the Disclosure Document how the pool's operator and advisor are compensated.

Understand, too, the procedure for redeeming your shares in the pool, any restrictions that may exist, and provisions for liquidating and dissolving the pool if more than a certain percentage of the capital were to be lost, Ask about the pool operator's general trading philosophy, what types of contracts will be traded, whether they will be day-traded, etc.

You can verify that these requirements have been met by contacting NFA toll-free at within Illinois call All futures exchanges are also regulated by the CFTC. The NFA staff consists of more than field auditors and investigators.

Firms and individuals that violate NFA rules of professional ethics and conduct or that fail to comply with strictly enforced financial and record-keeping requirements can, if circumstances warrant, be permanently barred from engaging in any futures-related business with the public.

The enforcement powers of the CFTC are similar to those of other major federal regulatory agencies, including the power to seek criminal prosecution by the Department of Justice where circumstances warrant such action.

Futures Commission Merchants which are members of an exchange are subject to not only CFTC and NFA regulation but to regulation by the exchanges of which they are members.

Exchange regulatory staffs are responsible, subject to CFTC oversight, for the business conduct and financial responsibility of their member firms. Violations of exchange rules can result in substantial fines, suspension or revocation of trading privileges, and loss of exchange membership.

Words of Caution It is against the law for any person or firm to offer futures contracts for purchase or sale unless those contracts are traded on one of the nation's regulated futures exchanges and unless the person or firm is registered with the CFTC. Moreover, persons and firms conducting futures-related business with the public must be Members of NFA.

Thus, you should be extremely cautious if approached by someone attempting to sell you a commodity-related investment unless you are able to verify that the offeror is registered with the CFTC and is a Member of NFA.

In a number of cases, sellers of illegal off-exchange futures contracts have labeled their investments by different names--such as "deferred delivery," "forward" or "partial payment" contracts--in an attempt to avoid the strict laws applicable to regulated futures trading. Many operate out of telephone boiler rooms, employ high-pressure and misleading sales tactics, and may state that they are exempt from registration and regulatory requirements.

This, in itself, should be reason enough to conduct a check before you write a check. Establishing an Account At the time you apply to establish a futures trading account, you can expect to be asked for certain information beyond simply your name, address and phone number.

The requested information will generally include but not necessarily be limited to your income, net worth, what previous investment or futures trading experience you have had, and any other information needed in order to advise you of the risks involved in trading futures contracts. At a minimum, the person or firm who will handle your account is required to provide you with risk disclosure documents or statements specified by the CFTC and obtain written acknowledgment that you have received and understood them.

Opening a futures account is a serious decision--no less so than making any major financial investment--and should obviously be approached as such. Just as you wouldn't consider buying a car or a house without carefully reading and understanding the terms of the contract, neither should you establish a trading account without first reading and understanding the Account Agreement and all other documents supplied by your broker.

It is in your interest and the firm's interest that you dearly know your rights and obligations as well as the rights and obligations of the firm with which you are dealing before you enter into any futures transaction.

If you have questions about exactly what any provisions of the Agreement mean, don't hesitate to ask. A good and continuing relationship can exist only if both parties have, from the outset, a clear understanding of the relationship. Nor should you be hesitant to ask, in advance, what services you will be getting for the trading commissions the firm charges.

As indicated earlier, not all firms offer identical services. And not all clients have identical needs. If it is important to you, for example, you might inquire about the firm's research capability, and whatever reports it makes available to clients.

Other subjects of inquiry could be how transaction and statement information will be provided, and how your orders will be handled and executed.

Why do futures prices converge on spot prices during the delivery month? - salonjardin.info

If a Dispute Should Arise All but a small percentage of transactions involving regulated futures contracts take place without problems or misunderstandings. For example if a physical commodity is way above the futures price, this will bring in arbitragers, speculators and hedgers who will buy the "cheap" futures contract, rather than the physical commodity; this will create demand for the futures contract pushing the price up towards the physical.

Arbitragers may also come into play and actively buy the futures and sell the physical hence locking in a profit. If the market was the other way around where futures were at a premium far in excess of the physical the market would be selling the futures and buying the physical. This activity can sometimes be seen particularly in the SPI where the premium gets driven far in excess of fair value in itself a subjective calculation ,and then a few days later the arbitrage is unwound bringing the market back to equilibrium.

So come to expiry time, with the cost of carry approaching zero the futures price will naturally converge to the physical price. This is especially evident in a deliverable contract where the participants must be able to buy in one market and sell in another.

This has been happening for many years as futures originally began as a means for producers to hedge their commodities. In cash settled contracts such as the SPI, the price convergence between the Index and the futures is automatic as there is an exchange settlement procedure so everyone gets the same price at expiry basis the cash, or spot price. This further highlights the relationship, and ultimate correlation, between the spot market and the futures market.

The market is more sophisticated than that but this is one example of a strategy you could use and monitor constantly in some circumstances. Markets are fluid and constantly changing so decide if leveraged derivatives fit your risk profile before you commence trading as the risk of loss is significant.