On Fri, Jul 07, 2000 at 01:03:10PM -0500, Richard Wackerbarth wrote:
> On Fri, 07 Jul 2000, Jon Trowbridge wrote:
>
> > Of course, with futures the value of the instrument doesn't change per
> > se;
>
> I think that the "value" does change. The "amount" remains constant, but the
> exchange rate varies.
>
> > instead, your account gets "marked to market" daily reflecting the
> > profit/loss you would face associated with delivery of the contracted
> > goods due to the difference between the contracts price and the
> > current market price. Another strange bit of accounting that it would
> > be nice to be able to handle.
>
> I guess I don't understand how this is different from my stock portfolio
> except that you subtract the underlying delivery price and only look at the
> "profit". I think that it has exactly the same components as a margin
> purchase of stock.
>From an accounting standpoint, maybe they are the same. (I'm an
accounting primitive.) However, they are technically quite different.
> Ignoring commission, etc. If I create a futures contract, I am saying that,
> at the prescribed date, I will exchange a load of beans for this contract
> plus a designated sum of cash. Therefore the contract is the combination of
> two sub accounts. The first of the load of beans and the second is the
> obligation to pay the cash. If the value of the load of beans is equal to the
> delivery price, the contract is even. If the beans are worth more, then the
> contract is worth more. This is the same as my brokerage account. When I tell
> the broker to buy a share of RedHat, I gain a share of RedHat and take on the
> obligation to pay the delivery price.
> The only difference is that you structure your reporting a little
> differently.
I think that the differences are substantial.
A futures contract is just that; a contract. It has no intrinsic
value outside of the gain or loss the execution of that contract might
expose you to.
> I typically pay off the margin and actually take delivery of the RedHat.
Remember, "margin" in futures trading means something totally
different than "margin" in stock trading. Futures margin is a
performance bond, meant to guarantee that you will uphold your side of
the contract.
Stock has intrinsic value, value and you are exchanging one thing of
value (money) for another (stock) at the time of purchase.
Soybeans (and most other physical commodities) are not cash settled:
at the delivery date, beans are swapped for dollars at the price
agreeds on when the contract was entered into. In the meantime, your
futures account (as well as the account of your counterparty in the
contract) has already been adjusted to account for the changes between
the original price and the current market price.
Another tidbit: because futures contracts have no intrinsic value, it
is basically impossible to define the ROI on individual futures
trades. Fun, huh?
-JT
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