On Fri, Jul 07, 2000 at 02:40:29PM -0500, Richard Wackerbarth wrote:
> On Fri, 07 Jul 2000, Jon Trowbridge wrote:
> > 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.
>
> Is it a bond (as in pledging of assets wherein you still retain the earnings
> thereon) or is it a partial payment (as an escrow account).
It is in fact a bond. You earn interest on all of the money in a
futures account, including that which goes towards meeting any margin
requirements.
> > Stock has intrinsic value, value and you are exchanging one thing of
> > value (money) for another (stock) at the time of purchase.
>
> Nope. It looks like a sheet of paper to me. :-) Often its just an entry in
> somebody's books.
>
> The Soybean contract is no different.
>
> Both of them are contracts giving the owner various rights and obligations.
>
> Owning a few shares of RedHat gives me the right to a pro-rata share of any
> distribution or liquidation and the right to cast a pro-rata vote on certain
> corporate decisions. It doesn't give me the individual right to physically
> liquidate their inventory and walk out with my 3 copy share.
Well, for what it is worth, holding shares in Red Hat means that you
*own* a (probably very small) percentage of Red Hat, and your rights
and obligations flow from that ownership.
If you hold futures contracts, you own *nothing*. Instead, you are
legally bound to perform a specific action at a specific time. Now
after you perform that action, you might be the proud owner of, say,
1000 barrels of crude oil.
If you offset your futures position before the delivery date, you are
freed of that legal obligation. You still own nothing. You never
owned anything. However, you still can have made or lost some money.
> > Another tidbit: because futures contracts have no intrinsic value, it
> > is basically impossible to define the ROI on individual futures
> > trades. Fun, huh?
>
> I disagree. ROI and IRR are well defined concepts that apply equally to these
> contracts. The inputs are the amounts that you surrender and the outputs are
> the amounts that you receive in return.
Ah, but you never had to surrender anything, now did you?
You can argue that if the margin is $1000, you were forced to
"surrender" that $1000 and hence it should be the denominator in any
calculation of returns. (This is the method favored by con men who
peddle dubious futures investments in gold or foreign exchange in late
night infomercials, since it can produce *extremely* high ROI numbers.)
There are lots of problem with this. For example, your margin
requirements can change over time, because of a change in policy by
the exchange or your broker --- should that change your ROI? And if
you lose money, more margin needs to be posted: you could lose $2000
in a trade with a margin requirement of $1000: was your ROI -200%?
-JT
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