Differentials And Derivatives Flashcards
Most physical traders prefer to trade the….
Basis rather than the outright price of the commodity
The basis is the difference in price between the
Price of the physical commodity and the futures contract
The basis is the portion of the total price of a commodity…
That a hedged trader is at risk
If you buy grain in Iowa and the sold futures on the Chicago exchange, where is the risk?
In the basis: on the difference in price between physical Iowa wheat you bought and the chicago futures sold.
Are you long or short on your basis?
Your long your basis
If your long your basis when do you make or los e money?
You lose money if the basis narrows, and make money if the basis widens.
What is calendar spreading?
Traders can trade the difference in price between two different contracts of the same commodity by buying one delivery month and selling another.
If I thought that next year’s sugarcane harvest in Brazil was going to be (much) better than the last one—and that I thought that there was little Brazilian sugar left to export from the last harvest….what would I do?
I might decide that the old-crop sugar for delivery against the March sugar futures was undervalued compared to the new-crop May sugar futures. I would then buy the March futures contract and sell the May futures contract.
Or suppose I thought that the new Brazilian harvest would be delayed for some reason and that there would be little new-crop sugar in May…..
….I might buy the May contract and sell the March contract.
An arbitrage is….
…. when you buy something in one market and at the same time sell the exact same thing in another market, profiting from a temporary difference in price. Raw sugar is not the same as white sugar.
what is quality arbitrage
Arabica coffee is not the same as robusta coffee. Selling one and buying another is sometimes called quality arbitrage, but it is really quality spreading; it is not risk free.
If I thought that white sugar was overvalued compared to raw sugar…
I would buy ICE Sugar No. 11 futures in New York and sell white sugar futures in the London market.
If i know that it costs me $100/t to import raw sugar from Brazil and refine it into white sugar. And for some reason the London market were trading at, say, $150 per tonne over New York, I would….
I would sell London futures and buy NY futures. Then, at a date that suited me, I could convert my raw sugar futures long into real physical sugar (by buying it on an EFP from a mill) and convert my short position in London white sugar into physical sales, again on an EFP
if you are long of something….
you own it
If March futures are trading at a higher price than the July futures, I will deliver my cocoa against the ….
March futures.
