clarification on futures contracts

[Picciotto, Sol]

I think Greg gives a mistaken and unhelpful way of looking at futures contracts. Each deal is a
separate contract, not the original contract being handed on between new parties. The vast
majority are closed out simply by a payment of difference, no delivery of any goods takes place.
In the case of many financial futures, e.g. stock index futures, delivery is not possible.
Futures contracts are a form of gambling, let's face it, and they had to get legislative
approval to be enforceable, which under most countries' laws a straight bet is not.

cheers

sol


> ----------
> From: 	Greg Nowell[SMTP:GN842 at CNSVAX.Albany.Edu]
> Reply To: 	lbo-talk at lists.panix.com
> Sent: 	Wednesday, September 30, 1998 9:38PM
> To: 	lbo talk
> Subject: 	clarification on futures contracts
> 
> There is *always* a forward delivery of something.  It
> might be something abstract, like a puchase of an index
> of stocks or a currency, or a bond at a given rate; but
> something changes hands between two parties at the
> end.  You can't have a futures contract without that;
> the final transaction where the delivery of goods
> occurs is called "closing out" the contract.
> 
> So you don't have zillions of futures contracts and
> very few forward deliveries.  But you CAN have zillions
> of intermediaries turning the SAME contract over and
> over between signing and forward delivery date.
> 
> Finally, you can have the SAME good be traded over and
> over again.  You can have a 30 year bond under contract
> for delivery at a given rate 6 months hence, and have
> it contracted somewhere else for delivery 9 months
> hence.  That is, party A and B have a contract, party C
> and D have a contract.  B upon receipt knows he will
> turna round and sell at the spot price to C or someone
> like C.
> 
> With a commodity like oil, contracts are taken out on
> stuff that hasn't been produced yet.
> 
> Since you can have a string of forward contracts on
> production in April, May, June....through the next
> year, and since you can have a string of forward
> contracts on what might be the same bonds changing
> hands, it is quite possible to have the value of
> forward contracts exceed current GDP.  GDP is the
> measure of things produced in teh PAST year.  Contracts
> are on FORWARD production.  With world GDP at about $22
> tr it makes sense that the sum of forward contracts is
> about one or two year's worth of GDP is contracted
> forward.  Many items are NOT so contracted, but many
> items such as bonds are contracted multiple times.
> That's how we can get to $50 tr of derivatives.
> 
> The catch is that CURRENT liquidity may be needed to
> meet margin calls on FUTURE deliveries of goods.  In
> essecne CURRENT finance can be sucked up to pay for
> FUTURE obligations.  The true danger is in the margins
> and leveraging.
> 
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
> 
> Fax 518-442-5298
> 
>