Subject: IC940901: What are futures?

From: "Gray Zhu, 800-289-2498, 212-279-6700" <[email-masked]>
Date: Thu, 1 Sep 94 23:37:27 CDT

==================    IC940901: Investment Club  ======================

1. What are futures? ................................... Gray Zhu
2. Another book introduced ............................. SHIWEI XU
_______________________________________________________________________
   (be sure to read the Disclaimer in the end if you have not read)

1. What are futures?

Let start with the fact that China had flood disaster this year, so
China is very likely to import wheat for early next year's needs. Now
the government is not sure about where the price is going to be next
year, say January. On the other hand farmer in the US is not sure what
price they can get when their crops grow up. The Chinese government
can sign a contract with a farmer in the US to buy wheat at the
current price say $1 million for 1,000,000 kilograms, i.e. $1/kg.
Both side will feel secure about their futures. The Chinese side will
have to pay a down payment 1% (let's assume so) for $1000. This is a
futures contract for $1000.

If the price of wheat rise from $1/kg to $1.01/kg, the farmer has to
pay $10,000 to the Chinese side, compensating the difference between
the market price and the contract price, So that if there is any
problem with the farmer's crops, China can buy from the market, it
will actually pay the contract price.

Now, China side can also sell the $1,000 contract for $11,000 in the
futures trading market, without exercising the contract, i.e. without
waiting for the wheat to be delivered. (??? - not sure)

On the other hand, If the price changes to $0.99/kg, China has to pay
the farmer $10,000 to the farmer. Because if China changes mind, the
farmer can still sell the wheat in the market, getting the total of 1
million dollars including the $10,000 + 1,000,000kg x $0.99/kg.

Again the farmer can sell the contract in the market for
$10000-$1000=$9000, because the $1000 down payment is taken by the
farmer already. (??? - not sure)

Traders rarely exercise contracts. They buy and sell many contracts
without the need of seeing the real thing. If we don't the real thing,
why don't we trade some numbers as well - this is exactly what index,
foreign currency futures all about.

As a matter of fact, China doesnt need to sign a contract with any
body, just need to buy contracts from the futures exchange. When I
LONG a contract (L1), I am buying a contract from the market, When I
SHORT a contract (S1), I am selling a contract. S1 after L1 is
actually selling a contract I have, net position is zero. L1 after S1
is covering a short position, net position is also zero. Either long
or short is called a position.

Although you can pay $1000 down payment for a contract, but you may
lose much more if the market goes down (up to $1 million in the
example case). But because the market is so huge and liquid, the price
does not change that much as you may think in a finite time period.

-Gray Zhu.

------------------------------------------
2. Another book introduced.

From: Shiwei Xu <[email-masked]>

My favorite book on investment is Benjamin Graham's "The Intelligent 
Investor".  It outlines the basic principles of the so called Value-
investing style that Graham popularized.  If it does't teach you a way
to beat the market, it will definitely tell you how not to lose money
through the ups and downs of your investment experience.  Another book
by Graham and Dodd is the classic "Security Analysis".  You learned a 
lot if you are up to it.  But if not, you have all the basics in the 
more straight forward "The Intelligent Investor".

-- 
SHIWEI XU
[email-masked]

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