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Why are futures contracts so large?


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Why are futures contracts so large?

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  #1 (permalink)
trading654
Oslo, Norway
 
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Is there a good reason for why each futures contract is so large?

For instance, even the mini gold contract is 10 ounces.

My question is, why didn't they create a 1 ounce contract so traders who want 10 ounces can just grab 10 contracts? Why the need to make each contract so large?

There has to be some good reason for why futures contracts were made like this. Only recently did we see all these mini contracts show up, but they are still pretty damn large. I just never figured it out.

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 treydog999 
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trading654 View Post
Is there a good reason for why each futures contract is so large?

For instance, even the mini gold contract is 10 ounces.

My question is, why didn't they create a 1 ounce contract so traders who want 10 ounces can just grab 10 contracts? Why the need to make each contract so large?

There has to be some good reason for why futures contracts were made like this. Only recently did we see all these mini contracts show up, but they are still pretty damn large. I just never figured it out.

Because they were made for commercial hedging in which cause buying 10 million contracts becomes unwieldy. they were not created for small account retailers.

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 bobwest 
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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.

"Because they were made for commercial hedging" is just about the correct answer for any question about futures. That's what they are for, and why they exist.

Bob.

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bobwest View Post
"Because they were made for commercial hedging" is just about the correct answer for any question about futures. That's what they are for, and why they exist.

Bob.

I don't agree with that at all.

The futures markets exist to enable speculation. Most trade is speculative, not hedging.

There are good arguments that say the futures markets cause the very price fluctuations that create the need for hedging in the first place.

In fact - there has been a push back - if you read the history of onion futures and the attempts to create cinema ticket futures, I think you get a different perspective.

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 bobwest 
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DionysusToast View Post
I don't agree with that at all.

The futures markets exist to enable speculation. Most trade is speculative, not hedging.

There are good arguments that say the futures markets cause the very price fluctuations that create the need for hedging in the first place.

In fact - there has been a push back - if you read the history of onion futures and the attempts to create cinema ticket futures, I think you get a different perspective.

Just shows you that there's more than one way to look at anything.

I'm not in it to hedge, that's for sure. Still, the need for hedgers to protect themselves is a big part of what is going on, however you may slice it.

Bob.

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 treydog999 
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DionysusToast View Post
I don't agree with that at all.

The futures markets exist to enable speculation. Most trade is speculative, not hedging.

There are good arguments that say the futures markets cause the very price fluctuations that create the need for hedging in the first place.

In fact - there has been a push back - if you read the history of onion futures and the attempts to create cinema ticket futures, I think you get a different perspective.

Speculation is definitely part of the equation but there are still massive amounts being hedged every day. But when futures where originally conceived it was for hedging to let producers reduce risk in doing their businesses. Now if the person on the other side of that trade was a speculator or some one else did not matter. the major economic benefits were in allowing major businesses, farms etc. to provide economic growth and be able to off set risks that would otherwise destabilize their ability to produce or provide said service at a consistent and reliable price. I do not think that the major contribution to the economy was at the hand of the speculator but at the ability for these businesses to grow and add jobs/ GDP/ production etc. The speculators profits are coincidental.

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trading654
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These are good comments, but still don't really answer the question because even if the contracts were small (such as 1 ounce gold contract), the larger players would still be able to do their thing just fine by simply using more contracts.

By not having small contracts, the exchanges are - whether we like it or not - shutting off a totally different segment of the population from their exchange (the smaller players). I'm just wondering why they did this. There has got to be a good reason the exchanges did this.

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 treydog999 
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trading654 View Post
These are good comments, but still don't really answer the question because even if the contracts were small (such as 1 ounce gold contract), the larger players would still be able to do their thing just fine by simply using more contracts.

By not having small contracts, the exchanges are - whether we like it or not - shutting off a totally different segment of the population from their exchange (the smaller players). I'm just wondering why they did this. There has got to be a good reason the exchanges did this.

Most commodities are based on physical deliverable sizes. Not some arbitrary contract unit

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DrewDown
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Speculators only came in because there is money to made by providing liquidity.

Futures were not meant for one person working on his own with a $5,000 account. No matter how cheap your broker sets intraday margins.

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