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Futures Pricing Question.

  • #1
  • First Post: Oct 15, 2007 5:10pm Oct 15, 2007 5:10pm
I notice that the price of far of expiry dated in the futures market lag behind the spot rate considerably;

Dec07 wheat 834.25 ish
Sep08 wheat 669.75 ish for example.

What is the reason for this? I am aware that far off expiry dates have daily limits on movements, but can't futures contracts be rolled over to the new month? In which case why not just have a rolling contract like Fx? What is the advantage of dealing in different contract months? Is it possible to hedge exposure by buying and selling different contract months, or would options be used instead?
  • #2
  • Oct 15, 2007 5:21pm Oct 15, 2007 5:21pm
I am no expert on wheat futures and I have never traded them. My understanding is speculators price in future market expectations. Like Natural Gas futures are always higher in winter, as speculators price in that more gas will be used in winter due to cold weather. The advantage is if you can buy at a cheaper price in the future, it would be a bonus if you wanted to hold them to expiry. I guess it is similar in some ways to holding a long USD/JPY position, where as the bonus would be the swap.

Quoting Ted1983
I notice that the price of far of expiry dated in the futures market lag behind the spot rate considerably;

Dec07 wheat 834.25 ish
Sep08 wheat 669.75 ish for example.

What is the reason for this? I am aware that far off expiry dates have daily limits on movements, but can't futures contracts be rolled over to the new month? In which case why not just have a rolling contract like Fx? What is the advantage of dealing in different contract months? Is it possible to hedge exposure by buying and selling different contract months, or would options be used instead?
  • #3
  • Oct 15, 2007 5:47pm Oct 15, 2007 5:47pm
Yeah, I have seen various articles which talk about the seasonal nature of various commodities, which of course makes sense from a supply/demand perspective.
I just don't see why there has to be contract months with expiry dates. If there was just a cash market surely the effect would be exactly the same? Is this something to do with primary futures and those who actually expect delivery, or just a relic from a bygone age before we could all "sign our lives away" at the click of a mouse?

BTW If anyone could recommend any decent books on the subject that would be snazma.
  • #4
  • Oct 15, 2007 6:51pm Oct 15, 2007 6:51pm
Quoting Ted1983
I notice that the price of far of expiry dated in the futures market lag behind the spot rate considerably;

Dec07 wheat 834.25 ish
Sep08 wheat 669.75 ish for example.
What is the reason for this? I am aware that far off expiry dates have daily limits on movements, but can't futures contracts be rolled over to the new month? In which case why not just have a rolling contract like Fx? What is the advantage of dealing in different contract months?
All else being equal...Dec Wheat will have Storage fees attached and will always trade at a premium to the prev {Spot}Sep Wheat. Not only for the Storage but for the pest control costs involved to prevent {minimize} loss of inventory... List... on... on

You have to remember that, as a Spec Trader, your goal is to think like the 2 commercials involved. Supplier {Farmer} & Consumer {Wonderbread}. Once you can assimilate these, then, Spec Trading becomes that much simpler.

Quoting Ted1983
Is it possible to hedge exposure by buying and selling different contract months, or would options be used instead?
Options are very complex BUT therefore inherently more flexible insomuch as Buying Calls or Puts OR Selling Calls or Puts. AND Add to that, Buying OR Selling The Spread Between Calls & Puts

http://www.agweb.com/get_article.asp...3770&src=fswht

hth
  • #5
  • Oct 15, 2007 6:55pm Oct 15, 2007 6:55pm
If you go to cbot.com.....click on education....then on LH side click on publications

They have loads of free info

The wheat market became inverted around June ie nearer months higher than later months
Before that it was in contango ie later months higher than near months

Inverted markets can be a sign of a bull move.

This happened in oil in early Aug .Its a sign of short supply and large demand
The greatest enemy of a good plan is the dream of a perfect plan.
  • #6
  • Oct 15, 2007 7:05pm Oct 15, 2007 7:05pm
Quoting Ted1983
I notice that the price of far of expiry dated in the futures market lag behind the spot rate considerably;

Dec07 wheat 834.25 ish
Sep08 wheat 669.75 ish for example.

What is the advantage of dealing in different contract months? Is it possible to hedge exposure by buying and selling different contract months, or would options be used instead?
You can trade different contract months if you have a broker who lets you

Its known as spread trading.

You could try searching on here but I dont think there is much info

If you look up Joe Ross in the members list and go to the link in his profile on his website he has info on spread trading
The greatest enemy of a good plan is the dream of a perfect plan.
  • #7
  • Last Post: Oct 16, 2007 8:21am Oct 16, 2007 8:21am
Great links guys. Will be reading through the Cbot stuff ASAP.

I don't necessarily plan to trade this stuff at the moment but I'm interested in finding out more about the relationship between various markets.

Also I figured as I'm still working on the technical aspects of my approach then why not test on agriculurals, metals etc. Come to think of it my best live trade so far was on the current XAU/USD rally, of course I closed it to early but thats what us neophytes are supposed to do after all.

Regards,

Ed.
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