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Why are futures contracts so large?


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Why are futures contracts so large?

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  #21 (permalink)
FoxKaren
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Futures markets allow speculation because most retail traders are speculative traders. But when the futures markets first came about they were specifically for producers/farmers who could reduce their risk when doing business. This allowed producers/farmers to hedge against price fluctuation.

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  #22 (permalink)
718XL
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treydog999 View Post
Because they were made for commercial hedging in which cause buying 10 million contracts becomes unwieldy. they were not created for small account retailers.


That makes sense, thank you for the clarification sir.

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  #23 (permalink)
Pedro40
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DionysusToast View Post
I don't agree with that at all.

The futures markets exist

..for insurance purposes. So the producer (farmer, miner, driller) can lock in a price in the future. If there is no price insurance, their livelihood would be too sensitive to volatility.

Now speculators use this leverage to speculate, that is another question, but not the reason for the contracts' existence.

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  #24 (permalink)
 
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Pedro40 View Post
..for insurance purposes. So the producer (farmer, miner, driller) can lock in a price in the future. If there is no price insurance, their livelihood would be too sensitive to volatility.

Now speculators use this leverage to speculate, that is another question, but not the reason for the contracts' existence.

Onions

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  #25 (permalink)
Pedro40
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DionysusToast View Post
Onions

Just because someone wanted to corner the onion future market, doesn't invalidate my point, what was also expressed by other knowledgable posters too. Try again. Or look it up in Wikipedia...

Onion farmers' desire to lock in future onion prices came first, the chick... I mean the speculators second....

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  #26 (permalink)
 
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Pedro40 View Post
Just because someone wanted to corner the onion future market, doesn't invalidate my point, what was also expressed by other knowledgable posters too. Try again. Or look it up in Wikipedia...

Onion farmers' desire to lock in future onion prices came first, the chick... I mean the speculators second....

The fact that Onion Futures were effectively banned was really nothing to do with activity specific to Onion Futures. Such activity could occur in any futures market.

There really is little evidence that the futures markets create price stability as opposed to causing instability.

The moving "Black Gold" is a good study of the negative effect of futures markets on farmers.

CME will introduce as many markets as it can to maximize profits. The push to introduce movie ticket futures was a good example of that and it got blocked.

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  #27 (permalink)
 
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When individual futures contracts are created there is hope that it would be liquid. The reality is that even the exchanges do not know whether a certain market would be liquid or not, whether the right leverage was built in and whether it would stay unmanipulated.

Products get listed and delisted due to lack of demand. Some stay listed with zero volume daily.

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  #28 (permalink)
Pedro40
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First future contracts are 4-500 years old, originating from Japan, IIRC. Nothing to do with CME's wish to increase trading activity.


DionysusToast View Post
There really is little evidence that the futures markets create price stability as opposed to causing instability.

For God's sake, read an example how a future contract works for the producer. The producer wants to know and lock in a preferable price 6 or whatever months out. Thus he buys insurance (aka short future contracts) to make sure if the price drops, his preferred price is locked in, so he doesn't suffer extra losses. If the price increases, hey, that is extra profit for him.

Same thing for other industrialist who uses products in big quantities. He buys long future contracts (let's say an airline oil futures) thus if the price of oil increases he is protected from extra cost. If oil falls, hey, his cost just got cheaper...

Just because others use fluctuation of future prices for speculation, that doesn't mean originally they were created for that purpose.

If you haven't got it by now, you probably won't get it so believe what you want...

So to answer the OP's question, they are large because they were made originally for industrial purposes and actual delivery, the speculation came later.

"The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who did. Or, the farmer who didn't want to deliver his wheat might pass his obligation on to another farmer The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the seller's contract would become less valuable. It wasn't long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low."

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  #29 (permalink)
 
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Pedro40 View Post
First future contracts are 4-500 years old, originating from Japan, IIRC. Nothing to do with CME's wish to increase trading activity.



For God's sake, read an example how a future contract works for the producer. The producer wants to know and lock in a preferable price 6 or whatever months out. Thus he buys insurance (aka short future contracts) to make sure if the price drops, his preferred price is locked in, so he doesn't suffer extra losses. If the price increases, hey, that is extra profit for him.

Same thing for other industrialist who uses products in big quantities. He buys long future contracts (let's say an airline oil futures) thus if the price of oil increases he is protected from extra cost. If oil falls, hey, his cost just got cheaper...

Just because others use fluctuation of future prices for speculation, that doesn't mean originally they were created for that purpose.

If you haven't got it by now, you probably won't get it so believe what you want...

So to answer the OP's question, they are large because they were made originally for industrial purposes and actual delivery, the speculation came later.

"The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew how much he would be paid for his wheat, and the dealer knew his costs in advance. The two parties may have exchanged a written contract to this effect and even a small amount of money representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans. They also began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he would sell the contract to someone who did. Or, the farmer who didn't want to deliver his wheat might pass his obligation on to another farmer The price would go up and down depending on what was happening in the wheat market. If bad weather had come, the people who had contracted to sell wheat would hold more valuable contracts because the supply would be lower; if the harvest were bigger than expected, the seller's contract would become less valuable. It wasn't long before people who had no intention of ever buying or selling wheat began trading the contracts. They were speculators, hoping to buy low and sell high or sell high and buy low."

Calm down - we are just exchanging opinions here. Don't presume knowledge is in absence because an opinion differs from your own.

Like I said - there is plenty of evidence that the futures markets are the cause of volatility. That they actually cause the very problems they are trying to fix.

Oil is a case in point. The swings in price are very much driven by speculation. Futures markets create the need for the insurance they provide.

As for contract size - on some markets they are sized to appeal to speculators. The mini and micro contracts are a good example of futures contracts created purely to attract speculators.

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  #30 (permalink)
 
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DionysusToast View Post
Calm down - we are just exchanging opinions here. Don't presume knowledge is in absence because an opinion differs from your own.

Like I said - there is plenty of evidence that the futures markets are the cause of volatility. That they actually cause the very problems they are trying to fix.

Oil is a case in point. The swings in price are very much driven by speculation. Futures markets create the need for the insurance they provide.

As for contract size - on some markets they are sized to appeal to speculators. The mini and micro contracts are a good example of futures contracts created purely to attract speculators.

Energy Daily Exchange Volume & Open Interest

Yesterday's figures for Crude Oil Future

Total volume traded: 746,306

Open interest: 2,029,807

Change from Open interest: -10,998

Change from Open interest is 1.5% of yesterday's traded volume. Everything else was open and closed in the same day.



It shouldn't even be a matter of opinion that 98.5% of trades open and closed yesterday, which suggests the overwhelming majority of trades is speculatory in nature.

Pedros may be right that originally the futures markets were conceived as a hedging mechanism.


But that's long gone as main mechanism.

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Last Updated on December 21, 2016


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