Spot and futures prices relationship goals

Oil Futures Point To Higher Oil Prices | badz.info

spot and futures prices relationship goals

ETFs utilize derivatives such as futures to accurately track their correlating assets. Contango – when the futures price is actually higher than the spot a tracking error as well if the fund uses futures to accomplish its goal. G14 G41 G47 Keywords: Electricity market Spot and futures prices Risk . Nord Pool market and for explaining the relationship between futures Note that the .. consistent- cients, β1 or β2, which is our goal, but some noisy values instead. We show that the relationship between the volatility of futures prices and the slope time-to-delivery, (ii) Spot and futures prices are mean reverting for many .. Our goal is to estimate a vector of structural parameters, θ ≡ {γ,µY,σY, i, rf, δ, λ}.

Backwardation would not only lead to stronger inventory declines, but it would also throw a wrench in the plans of U. Shale drillers typically lock in a certain portion of their production a year ahead of time, which insulates them from another downturn.

So they could be profitable even as the prevailing spot price looked weak. Backwardation would upend that calculation. That could translate into spending cuts, more modest drilling programs, and ultimately, lower oil production in Without the certainty of locking in production with hedging, it would be much riskier for these drillers to move ahead aggressively.

To sum up, a shift into backwardation could slow the growth of shale to some extent. A Red Flag For Oil? By taking barrels off of the market, they are draining inventories and narrowing the market contango. The end goal is higher prices, and we will eventually get there. The one other wrinkle in this argument is the unpredictability and changing nature the futures curve. Shale can start and stop supply so quickly, that the longer-dated futures are much less reliable than they used to be.

When you look at oil…commodities are not anticipatory assets. Nevertheless, going forward, the futures market is starting to point to market tightness, a sign of stronger inventory declines and eventually higher prices.

By Nick Cunningham of Oilprice.

Futures and forward curves (video) | Khan Academy

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.

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.

spot and futures prices relationship goals

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.

spot and futures prices relationship goals

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.

Oil Futures Point To Higher Oil Prices

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.

If a Dispute Should Arise All but a small percentage of transactions involving regulated futures contracts take place without problems or misunderstandings. However, in any business in which some million or more contracts are traded each year, occasional disagreements are inevitable.

Obviously, the best way to resolve a disagreement is through direct discussions by the parties involved. Failing this, however, participants in futures markets have several alternatives unless some particular method has been agreed to in advance. Under certain circumstances, it may be possible to seek resolution through the exchange where the futures contracts were traded.

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Or a claim for reparations may be filed with the CFTC. However, a newer, generally faster and less expensive alternative is to apply to resolve the disagreement through the arbitration program conducted by National Futures Association. There are several advantages: You can elect, if you prefer, to have arbitrators who have no connection with the futures industry. You do not have to allege or prove that any law or rule was broken only that you were dealt with improperly or unfairly.

In some cases, it may be possible to conduct arbitration entirely through written submissions. If a hearing is required, it can generally be scheduled at a time and place convenient for both parties.

Unless you wish to do so, you do not have to employ an attorney. For a plain language explanation of the arbitration program and how it works, write or phone NFA for a copy of Arbitration: The booklet is available at no cost.

What to Look for in a Futures Contract? Whatever type of investment you are considering--including but not limited to futures contracts--it makes sense to begin by obtaining as much information as possible about that particular investment. The more you know in advance, the less likely there will be surprises later on.

Moreover, even among futures contracts, there are important differences which--because they can affect your investment results--should be taken into account in making your investment decisions. The Contract Unit Delivery-type futures contracts stipulate the specifications of the commodity to be delivered such as 5, bushels of grain, 40, pounds of livestock, or troy ounces of gold.

Foreign currency futures provide for delivery of a specified number of marks, francs, yen, pounds or pesos. Futures contracts that call for cash settlement rather than delivery are based on a given index number times a specified dollar multiple. This is the case, for example, with stock index futures. Whatever the yardstick, it's important to know precisely what it is you would be buying or selling, and the quantity you would be buying or selling.

How Prices are Quoted Futures prices are usually quoted the same way prices are quoted in the cash market where a cash market exists. That is, in dollars, cents, and sometimes fractions of a cent, per bushel, pound or ounce; also in dollars, cents and increments of a cent for foreign currencies; and in points and percentages of a point for financial instruments.

Cash settlement contract prices are quoted in terms of an index number, usually stated to two decimal points. Be certain you understand the price quotation system for the particular futures contract you are considering.

Minimum Price Changes Exchanges establish the minimum amount that the price can fluctuate upward or downward. This is known as the "tick" For example, each tick for grain is 0.

You'll want to familiarize yourself with the minimum price fluctuation--the tick size--for whatever futures contracts you plan to trade. And, of course, you'll need to know how a price change of any given amount will affect the value of the contract. Daily Price Limits Exchanges establish daily price limits for trading in futures contracts. The limits are stated in terms of the previous day's closing price plus and minus so many cents or dollars per trading unit.

Once a futures price has increased by its daily limit, there can be no trading at any higher price until the next day of trading. Conversely, once a futures price has declined by its daily limit, there can be no trading at any lower price until the next day of trading.

The price is allowed to increase or decrease by the limit amount each day. For some contracts, daily price limits are eliminated during the month in which the contract expires. Because prices can become particularly volatile during the expiration month also called the "delivery" or "spot" monthpersons lacking experience in futures trading may wish to liquidate their positions prior to that time.

Or, at the very least, trade cautiously and with an understanding of the risks which may be involved. Daily price limits set by the exchanges are subject to change. They can, for example, be increased once the market price has increased or decreased by the existing limit for a given number of successive days.

Because of daily price limits, there may be occasions when it is not possible to liquidate an existing futures position at will.

spot and futures prices relationship goals

In this event, possible alternative strategies should be discussed with a broker Position Limits Although the average trader is unlikely to ever approach them, exchanges and the CFTC establish limits on the maximum speculative position that any one person can have at one time in any one futures contract. The purpose is to prevent one buyer or seller from being able to exert undue influence on the price in either the establishment or liquidation of positions. Position limits are stated in number of contracts or total units of the commodity.

The easiest way to obtain the types of information just discussed is to ask your broker or other advisor to provide you with a copy of the contract specifications for the specific futures contracts you are thinking about trading. Or you can obtain the information from the exchange where the contract is traded. Understanding and Managing the Risks of Futures Trading Anyone buying or selling futures contracts should clearly understand that the Risks of any given transaction may result in a Futures Trading loss.

The loss may exceed not only the amount of the initial margin but also the entire amount deposited in the account or more. Moreover, while there are a number of steps which can be taken in an effort to limit the size of possible losses, there can be no guarantees that these steps will prove effective. Well-informed futures traders should, nonetheless, be familiar with available risk management possibilities.

Choosing a Futures Contract Just as different common stocks or different bonds may involve different degrees of probable risk.

The market for one commodity may, at present, be highly volatile, perhaps because of supply-demand uncertainties which--depending on future developments--could suddenly propel prices sharply higher or sharply lower. The market for some other commodity may currently be less volatile, with greater likelihood that prices will fluctuate in a narrower range.

You should be able to evaluate and choose the futures contracts that appear--based on present information--most likely to meet your objectives and willingness to accept risk. Keep in mind, however, that neither past nor even present price behavior provides assurance of what will occur in the future. Prices that have been relatively stable may become highly volatile which is why many individuals and firms choose to hedge against unforeseeable price changes.

Liquidity There can be no ironclad assurance that, at all times, a liquid market will exist for offsetting a futures contract that you have previously bought or sold. This could be the case if, for example, a futures price has increased or decreased by the maximum allowable daily limit and there is no one presently willing to buy the futures contract you want to sell or sell the futures contract you want to buy.

Even on a day-to-day basis, some contracts and some delivery months tend to be more actively traded and liquid than others.