Futures Contract Example

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We have all heard the stories about the opening bell and its possible implications for a futures contract, so let’s begin with an example. Suppose a futures contract for one barrel of oil was open for trading and closed at closing time with no changes to be made at closing. When the contract closed at its last-minute change in price, the futures contract would then have given a profit of five dollars to the investor that had purchased the contract.

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Now suppose that at the previous closing time there had been a twelve-hour period of inactivity. There would have been no change in price and the same five-dollar profit would have accrued for the same oil contract. The same thing would happen if the contract were open on Christmas Eve or New Year’s Eve, or on any other holiday that was not a holiday.

In a futures contract, you trade against the position that is agreed upon at the point of trade. Now suppose that a producer had agreed to supply oil and that at the point of trade the futures contract contained a loss of one hundred dollars for that period. Now suppose that at the next minute of trading the producer announced that they were now supplying oil for one dollar less than the contract. If the contract was closed at the last minute when there was a change in price the trader would have a loss of five dollars.

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This is a simple example of how a futures contract can be affected by price changes. You might think that this has only been applied to the manipulation of the futures market by those that you might describe as “big speculators” but of course any trader, even those who do not have a large amount of money at stake will make such trades.

The great news is that commodity prices are now in the hands of the large commodity trading houses and those that the commodity futures markets contain. This should be of some comfort to those that have been concerned about the manipulation of the commodity markets by large speculators. As the futures contracts become more complex and the futures exchange continues to grow this is probably a good thing.

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What we need now is a futures contract example that shows how large traders manipulate the commodity markets by suddenly changing the price of the commodity without any notice. Perhaps there will be some examples that show just how the traders manipulate the futures markets to create price movements that are meant to benefit their own companies and not the consumers.

Please consider all this and think on it. Please consider the futures trading markets for your information and understanding.

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