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Originally Posted by 6chr0nic4
where are the contracts derived from? if your position expires you're suppose to in theory take physical delivery of the commodity (although rare)
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It's not in theory though, you are committed. If you are short, you deliver 5000 bushels. If you are long you have to accept 5000 bushels.
How are the contracts derived?
Now regularly if you were say a corn farmer and your 5000 bushels won't be ready until september and you like the price right now, say $6. It works out for you considering your costs etc. So now you look at corn futures for september and see that you can see that that contract is trading @ $6.25. (Just like the stock mkt, it's an auction mkt.) So you go into the mkt and sell 1 september corn futures = 5000 bushels, making you short. You've sold your crop now for sept @ $6.25 a bushel and you don't have to worry about corn prices dropping.
As Gnome mentions at the end of each day the clearing house takes the end of day price for september corn and then withdraws or deposits into each account accordingly.
When sept comes around, as a farmer in the business, of course you have your regular/local business contacts that you would send your corn to. You don't want to send your corn to the clearing house's warehouse so you go back to the CME and buy a september corn contract. If corn prices are now $6 / bushel you buy one and that cancels out your short position ie your commitment to deliver.
So with that price, your account has credit of $1250. 25 cents X 5000
You sell your corn to your regular guy at the current price $6 and don't miss out on the $6.25 price
Quote:
Originally Posted by 6chr0nic4
@minoru
The CFTC doesn't list physical commodity trades made by private grain companies (which in Canada hold considerable market share)
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Correct, the CFTC would not list physical commodity trades. CFTC stands for Commodity Futures Trading Commission and physical trades are not futures.
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