On Fri, 07 Jul 2000, Jon Trowbridge wrote:
> This is correct. One CBOT Soybean futures contract is for 5,0000
> bushels of beans, but the price is quoted by the bushel, in eighths of
> a cent.
Of course there are no actual soybeans involved. You are really just trading
pieces of paper :-)
> Of course, with futures the value of the instrument doesn't change per
> se;
I think that the "value" does change. The "amount" remains constant, but the
exchange rate varies.
> instead, your account gets "marked to market" daily reflecting the
> profit/loss you would face associated with delivery of the contracted
> goods due to the difference between the contracts price and the
> current market price. Another strange bit of accounting that it would
> be nice to be able to handle.
I guess I don't understand how this is different from my stock portfolio
except that you subtract the underlying delivery price and only look at the
"profit". I think that it has exactly the same components as a margin
purchase of stock.
Ignoring commission, etc. If I create a futures contract, I am saying that,
at the prescribed date, I will exchange a load of beans for this contract
plus a designated sum of cash. Therefore the contract is the combination of
two sub accounts. The first of the load of beans and the second is the
obligation to pay the cash. If the value of the load of beans is equal to the
delivery price, the contract is even. If the beans are worth more, then the
contract is worth more. This is the same as my brokerage account. When I tell
the broker to buy a share of RedHat, I gain a share of RedHat and take on the
obligation to pay the delivery price.
The only difference is that you structure your reporting a little differently.
I typically pay off the margin and actually take delivery of the RedHat.
(Maybe that's why my closet is full of Millinery :)
You, on the other hand, never expect to pay the margin or have the beans
dumped in your yard. As a result, you look at the cost to get out of the
agreement. But this is that same thing that I do if I am considering selling
my stock. I consider the difference in the cost to get in and how much I can
receive when I get out.
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