clarification on futures contracts

[Greg Nowell]

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