The Futures and Derivatives Markets (Part 1).

The Futures and Derivatives Markets (Part 1).

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.20x).

#futures market, #index, #go long, #go short,

This blog post is designed to explain the working of the futures markets so that investors can see through the manipulations of those markets. The blog does NOT advise anyone to enter those high risk markets.

1. The original useful roles of futures markets.

There are many futures markets. The main ones are listed in the following:

1a. Gold Futures (Gold futures for various delivery times)

Gold Futures are for gold smiths and jewelers.

Jewellery makers love to receive contracts to supply jewelleries in advance to smooth out their production. Unless the customers provide raw gold or agree to pay at whatever unknown future market price no contract can be made. This rarely happens. So to get binding contracts, they have to know the price of gold few months or few years ahead, for the time they will start their machining process but knowing the future is impossible.

So a jeweller has to peg his contract price for those items to be supplied on a future date on whatever guesses given by the “Gold Future Markets”. When his contract to supply is binding he simultaneously enter into contracts with some counter-parties to get a payout to compensate for any unexpected rise from that agreed price of raw gold. On the other hand, if gold price falls on that date, he will have to pay out to his counter-parties. In this way he get a fix profit from his contract, irrespective of any fluctuation of gold price.

The same principle applies to gold producers or even national treasurers. For example, during the Asian Financial Crisis (triggered by some billionaire G.S. ‘s attack on Thai’s baht) the treasurer of Korea had to sell Korean gold to repay Korean debts. Whenever there is a due payment by Korea, the price of gold dropped from its othrwise constant value of USD273/oz.

To avoid having to sell gold at the artificial, unfair dips on the due dates, a gold producer (or even the treasurer of Korea) would have to enter into “Gold Future Contracts” (“going short”) with counter-parties to get a payout to compensate for any unexpected fall from that agreed price. On the other hand, if gold price rises on that date, he will have to pay out to his counter-parties. In this way he get a fix price from his contract, irrespective of any fluctuation of gold price.

1b. Metal Futures (Copper futures, Nickel futures, Iron futures).

Metal Futures (Copper futures, Nickel futures, Steel futures) are for consumers and producers of metals.

The same principles also apply to consumers and producers of other metals such as copper, steel, lead, zinc, tin, nickel, chrome, etc…

1c. Food Staples Futures (Soybean futures, Rice futures).

Food Staples Futures (Soybean futures, Rice futures) are for food processors and producers.

1d. Currency futures.

Currency futures are for importers and exporters.

1e. Shares-market-index futures.

Shares-market-index futures are for investment managers of superannuation and pension funds who have holding spread out on many companies and want to instantly peg their buying or selling prices at some fix level.

1f. Rain-fall futures.
Rain-fall futures are for farmers whose incomes and expenses vary widely with rain-falls.

Farmers have to buy water transported by tankers if there is no rain. They would be happy to pay a fix amount to a counter-party whether it rains or not. They will use the payout from the counter-party to buy water.

2. Method of betting on an index.

Players buy units of betting. For example, one unit of betting on the SPI Share Market Index may make a gain or loss of $US 20 for each point of the index in favor or against the player.

The deciding moment may be closing time (4:00pm) of the last trading Friday of the month.

For example, let the betting be $20 per unit and let the current date be 2018 November 13, the Current value of a chosen index on the market is 5950, the current estimate for that index on Friday 30th Nov 2018 may be 6010 as given out by some “betting house”.

A player L may buy one unit of betting on LONG. At (4:00pm) of Friday 30th Nov 2018 if that index is 6020, he wins 6020 – 6010 = 10 units and will be paid $20*10 = $200. At (4:00pm) of Friday 30th Nov 2018 if that index is 5090, he loses 6010 – 5090 = 20 units and will be have to lose $20*20 = $400.

On the other hand, a player S may buy one unit of betting on SHORT. At (4:00pm) of Friday 30th Nov 2018 if that index is 6020, he loses 6020 – 6010 = 10 units and will have to pay $20*10 = $200. At (4:00pm) of Friday 30th Nov 2018 if that index is 5090, he wins 6010 – 5090 = 20 units and will be paid $20*20 = $400.

So a player may win or lose if his guess is better or worse than that offered by the “betting house”.

3. Using index betting for a large investment.

An investor has at hand $100,000 and will spread his total investment of $1000,000 over the whole 200 largest companies of the share markets.

He knows the dip of the index is the best time to buy all stocks but buying is a time consuming process and the dip may not last that long.

Suppose that the current index of the market is nearly 6000. His $1M investment will go up and down with the market according to the index. Suppose that the index is up by 1 unit, his investment will go up by $(1/6000)*1M=$166. So he will need a rough value of $166/$20 = 8.3 units of betting.

His strategy will be to buy 8 units of betting on LONG at the dip of the market, then takes time to buy into individual company without any need for further timing. Any increase or decrease in those 200 company share prices is roughly compensated by the gain or loss on the betting on the index.

to be continued

References.

Tuesday’s announcement by the Department of Justice of a guilty plea by a former trader of JPMorgan for systemic “spoofing” and price manipulation of gold, silver, platinum and palladium traded on the COMEX and NYMEX futures exchanges (owned by the CME Group) sure seemed like a very big deal …. The infractions occurred from 2009 to 2015 and the trader admitted to engaging in a conspiracy to commit market manipulation on hundreds of occasions, with the knowledge and consent of his immediate supervisors. [1, 2]

[1]. http://silverseek.com/commentary/crack-dike-17474

[2]. https://socioecohistory.wordpress.com/2018/11/10/a-crack-in-the-gold-silver-manipulation-dike/

[3]. https://www.zerohedge.com/news/2018-11-06/jpmorgan-gold-spoofer-admits-manipulating-precious-metals-markets-years

Added after 2018 Dec 09:

“If this has occurred recurrently, it is a BIG story because it suggests systematic favoritism,”

[4]. https://nypost.com/2018/12/07/nyse-is-freaking-out-looking-for-leakers-after-post-expose/

Added after 2019 Feb 15:

[5]. https://socioecohistory.wordpress.com/2019/02/15/deutsche-bank-to-pay-c5-5-million-to-settle-canadian-gold-and-silver-market-rigging-cases/

[6]. https://survivaltricks.wordpress.com/2020/04/12/here-is-the-secret-weapon-that-allowed-tiny-oil-producer-mexico-to-defy-giant-saudi-arabia-nation-and-state/

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