> 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