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Are futures contracts created of an thin air?


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Are futures contracts created of an thin air?

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  #1 (permalink)
Poland
 
 
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Are futures contracts created of an thin air or there is some set amount of contracts on exchange? What i want to understand : if there is a buyer and seller can exchange create as many contracts at its necessary so the deall will take place?

I want to understand whole concept of contracts. Ty guys for help

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  #3 (permalink)
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PolTrader View Post
if there is a buyer and seller can exchange create as many contracts at its necessary so the deall will take place?

This. But remember it's symmetrical. For every buyer there has to be the seller. The exchange is not involved in any of the trades (other than arranging and clearing them). It is not like stocks where there are predetermined number of shares available.

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Poland
 
 
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So this means that there is no limitation for number of contracts, am i right?

Ty for your post.

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Legendary Market Wizard
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Correct.

If you look at most futures price settlement reports you will see a column for "Open Interest". This is the number of contracts currently open. This data is normally delayed by one day.

For example for Eurodollars.... "Prior Day Open Interest"


https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_settlements_futures.html

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SMCJB View Post
Correct.

If you look at most futures price settlement reports you will see a column for "Open Interest". This is the number of contracts currently open. This data is normally delayed by one day.

For example for Eurodollars.... "Prior Day Open Interest"


https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_settlements_futures.html

Thanks for the useful info @SMCJB . A follow up question:

Does remaining open interest at contract expiration tell us how many contracts are taking delivery?

I haven't given it much thought, but I would suppose that is the case. I don't have silos or oil tanks, so I have never taken delivery on any contracts.

~vmodus

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vmodus View Post
A follow up question:
Does remaining open interest at contract expiration tell us how many contracts are taking delivery?

I theory yes, in practice I'm sure it depends upon the contract. Many contracts are financially settled and do not involve any delivery. Obvious examples are ES/S&P 500. Less obvious examples are HH which is a NG financial lookalike contract - same risk just no physical delivery. My experience in this area is limited to NG and CL and even then it's not something I've done in many years. The exchange requirements for going to delivery in those contracts are quite onerous requiring full cash margining before delivery actually occurs. The exchanges also have something called an "ADP" which stands for alternative delivery procedure, which basically means you and the counterparty agree to go to delivery outside of the exchange. So in reality most deliveries actually get ADP'd rather than go through the exchange delivery mechanism. The one big reason you wouldn't do this is if you were matched with a counterparty and you were not happy with the credit risk. There used to be a report that listed how many contracts went to delivery and how many of them in reality were ADP'd but I can't find it. This report here though does show you how many energy contracts have gone to delivery this year (and by who!)
https://www.cmegroup.com/delivery_reports/EnergiesIssuesAndStopsYTDReport.pdf

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It's important to ponder these things, for sure. But only to a measured amount.

I believe it is helpful to first examine the word itself: Contract. (I understand the language barrier can be formidable, here.)

For the word contract ..think attorney, lawyer.

An agreement between two parties. In this case between a buyer and a seller. That's it. How many contracts can an Attorney come up with? They can do it all day everyday....there is no limit...as long as two parties agree to it, BAM, another contract.

Same exactly with these Futures Contracts..............

Ron



PolTrader View Post
Are futures contracts created of an thin air or there is some set amount of contracts on exchange? What i want to understand : if there is a buyer and seller can exchange create as many contracts at its necessary so the deall will take place?

I want to understand whole concept of contracts. Ty guys for help


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Legendary Market Wizard
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SMCJB View Post
I theory yes, in practice I'm sure it depends upon the contract. Many contracts are financially settled and do not involve any delivery. Obvious examples are ES/S&P 500. Less obvious examples are HH which is a NG financial lookalike contract - same risk just no physical delivery. My experience in this area is limited to NG and CL and even then it's not something I've done in many years. The exchange requirements for going to delivery in those contracts are quite onerous requiring full cash margining before delivery actually occurs. The exchanges also have something called an "ADP" which stands for alternative delivery procedure, which basically means you and the counterparty agree to go to delivery outside of the exchange. So in reality most deliveries actually get ADP'd rather than go through the exchange delivery mechanism. The one big reason you wouldn't do this is if you were matched with a counterparty and you were not happy with the credit risk. There used to be a report that listed how many contracts went to delivery and how many of them in reality were ADP'd but I can't find it. This report here though does show you how many energy contracts have gone to delivery this year (and by who!)
https://www.cmegroup.com/delivery_reports/EnergiesIssuesAndStopsYTDReport.pdf

Cool, thank you for the detailed response! I know you are an energies person, so I figured you may know. I do know that if you take delivery on a grain, you essentially have to pay for storage of the grain (literally a rented silo). And of course the contract itself.

On a related topic, I was reading Trading Sardines by Linda Bradford Raschke a couple weeks ago, and pranked on one of her team members instructing her to let an open oats contract expire so they could take delivery. Funny story.

~vmodus

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While not directly related an indirect hint here is to "understand why something came into existence". It would be easier to deal with lot of things in future if we shift our approach to that as its impossible to know everything about everything.

I suggest you to read light but filled with serious details at the same time

"Money and Power: How Goldman Sachs Came to Rule the World"

Here you will know why hedging vehicles came into existence, why FnO came into existence, why usually financial funds get so big as they do, who/what controls the politics behind the scenes and why usually pension funds end up with bad and very ugly risky positions. It is not technical read just very good average mans guide to possible "Explanation" why he got/gets scr*wed.

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