Full Carrying Charge Market

A full carrying charge market is one where the prices for successive delivery months reflect the cost of holding the commodity or financial instrument. Commodities can be bought in the cash market and stored for later consumption. As we have seen, the person who performs the storage function gets a fee for this service. It is necessary to keep grains dry, to protect them against fire, to keep the rat population to a minimum, and to provide insurance on the stored commodities. Insurance is necessary to protect against loss of the goods because of tornado damage, floods, fire, and even explosions. Every few years we read of spectacular blowups of a grain elevator. The dust and fine seed particles that can get suspended in the air will ignite with a vengeance under certain circumstances. Read more »

Posted: February 2nd, 2008 under Futures Contracts, Futures Market, Futures Prices.
Comments: 4

Normal Backwardation

Remember that investors do not like risk, and that they will take a risk only if they think they will be properly rewarded for bearing the risk. If the futures price is what people think the cash price will be at delivery time, why would anyone be interested in speculating? It seems that the hedger can get rid of the price risk without any cost and that the speculator agrees to take the risk off the hedger’s back for nothing. This seems improbable in real life. Read more »

Posted: February 2nd, 2008 under Futures Contracts, Futures Market, Futures Prices.
Comments: 4

In considering what makes a futures contract valuable and what makes the price of the contract fluctuate from day to day, it is important to remember that a futures contract is a promise to exchange certain goods at a future date. You must keep your part of the promise unless you get someone to take the promise off your hands (that is, you make a closing transaction). The promised goods are valuable now, and their value in the future may be more or less than their current worth. Prices of commodities change for many reasons, such as new weather forecasts, the availability of substitute commodities, psychological factors, and changes in storage or insurance costs. These factors all involve shifts in demand for a commodity, changes in the supply of the commodity, or both. Read more »

Posted: February 2nd, 2008 under Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 3