25 Questions about Derivatives

1. What are the differences between trade with commodity futures and the cash markets?

In cash market trading (eg. B. the sale of potatoes from the farmer to the detection traders) are transactions between two parties with the effective accomplishment based. The actual exchange of goods is therefore the main motivation to be active in the spot market. The term includes both spot trading (timely fulfillment) as well as the forward trading (subsequent fulfillment) with goods. The prices obtained are called spot market prices. A key differentiator between the cash market and the futures market is that the actual exchange of goods in commodity futures transactions neither intentional and eg in potato futures at Eurex in Frankfurt also not possible. The futures market is a parallel market to the spot market and can therefore be used to hedge price risks, as well as for speculative purposes.

Furthermore, the operations can be differentiated by

  •      their trade object (individual versus standardized specification)
  •      the type of business transaction (Physical delivery of potatoes versus trading with a derivative)
  •      the organizational form of the associated market (clearing).

2. What is the general definition of a commodity futures contract (futures)?

Commodity futures contracts (futures) are

  •      legally binding agreements,
  •      a well-defined performance
  •      to perform at a specified time in the future.

3. How are futures designed and what is standardization for?

An essential feature of commodity futures contracts is their mutual acceptability. The price-determining parameters

  •      amount
  •      quality
  •      Compliance period and possibly
  •      Place of Performance

are not individually negotiated between buyer and seller, but are in the Future specifications accurately determined (eg. B. 25 tons processing potatoes from production site in Germany, the Netherlands, Belgium and France, loose loaded on the means of transport by the buyer). This exact normalization is called standardization. It does not mean that you can only participate in the futures trading, if the actually traded commodity (eg. B. purchased on the spot market potatoes) corresponds exactly to the specifications. On the contrary, you can also participate in the commodity futures trading when trading different goods in the spot market, or buy any goods or wants to sell.

4 Where are commodity futures contracts traded?

Commodity futures contracts are traded on commodity futures exchanges. Exchanges are highly organized market events are strictly defined in terms of the place, the time, the market participants and with the sequence. Because of modern communication technologies, these are in many cases to computer exchanges. Supply and demand flow together here over an electronic network and are bundled into a central computer. Consequently, you can participate from anywhere in trading.

5 Who can trade on commodity futures exchanges?

Theoretically, anyone can participate in commodity futures trading. There are, however, to meet certain requirements, which may differ across exchanges. The personal requirements as well as play at the opening of a securities account the experience, the objective and the financial situation of the applicant a role. These aspects also determine the extent to which the relevant market participant may act. The technical prerequisites an account with a clearing bank and connected a contractual agreement are to lead to a connected broker.

6. What happens exactly during trade on commodity futures exchanges?

All exchanges have in common that the orders converge at a central location (trading floor or central computer). With regard to the order entry but there are differences. So-called proprietary traders (individuals acting on their own behalf) may enter orders directly into the electronic trading system or have on stock exchanges a seat. For all other market participants entering orders to the commandments orally, by telephone, by fax via a broker, be transmitted or via computer. In exchanges with electronic trading system, the incoming requests are stored and executed in the appropriate order situation. In floor trading, the broker takes care locally to an execution of the order.

7. When will an order be executed?

Since commodity futures contracts all price-determining parameters are normalized, the execution depends largely on whether another market participant is willing to offer (demand) contracts to purchase at a desired price (sell). In addition, it is relevant that order type of market participant has chosen. Suppose a trader wants to capture 20 contracts potatoes well sell, then this job could (usually called market order) are carried out in good order situation immediately to a uniform price. It would also be conceivable, the ten contracts for at best and ten contracts are traded for zweitbestmöglichen price. In a small market depth could occur due to lack of buying interest corresponding to a partial execution. Then a limit order in which z., 15 contracts were traded immediately and the other five were initially available at a limited rate in the system is recommended. Such partial execution could also be used with an all-or-nothing order prevented. Probably the most common order type is the limit order. You will only be executed if the stock price is above (sell order) or below (purchase order) the limit is reached or this.

8. What do the terms money (bid) and letter (ask) mean?

The purchase and sales readiness is expressed by the bid and ask prices. When the bid price (bid) is called the rate (price), is willing to pay a buyer for the Future and the moment there is no offer. Under the ask price (ask) refers to the course that requires a salesperson for the Future.

Suppose the equilibrium price of a potato contract would be at 20, then the order book (order book) might look like this:

  •      Number (volume)
  •      Money (bid)
  •      Letter (ask)
  •      Number (volume)
Amount (Volume)
Money (bid)

Letter (ask)

Amount (Volume)


The number of columns it can be seen how many contracts offered at the applicable rate (ask) or demand (bid) are. In the example, stood 5 contracts at a rate of 20.1 for sale. The number of requested contracts at a price of 19.9 cheating 20 The difference between these best rates (the highest bid to buy and the lowest offer to sell) is called the bid-ask spread - here 0.2. A stock market is all the more powerful, the narrower the bid-ask spread and the higher the market depth (market depth) is. A market is described as deep, when sufficient orders, which are staggered close to the equilibrium price and also in the depth (in the example, there are 20 Bids 19.9. Were only two, would be the market depth is lower. It).

9. What is meant by opening (price), high, low and closing (price)?

The terms are used in a session for each contract pursuant to the above order for the opening, the highest, the lowest and the closing price. According to the Name is the opening price (closing price), the price of the first (last) trade accounts one day and the maximum price (lowest price), the price of the highest (lowest) trading accounts at the time of the inspection.

10. Do closing and settlement prices differ?

The closing price of the trading day, the price of the last trade accounts. With settlement price of the valuation price is referred to, is significant to the daily profit and loss calculation. It may correspond to the closing price, but is also often calculated from the last sales a day.

11. Who the respective contract partner who takes on the opposite position?

If a contract is sold, is not another stock exchange customer contract partner of the seller, but between the two market participants a clearinghouse is connected. The counter position for all contract purchases and sales is taken from this clearinghouse (Clearing Bank). They are all stock brokers performance guarantee. Therefore, the parties have to fear no default risk. In addition, the anonymity of trading is guaranteed by the clearing house.

12. What are the financial requirements related to creating an opening position?

If contracts are traded and opened in accordance with futures positions, are buyer and the seller to pay the commission and to deposit collateral. With the commissions involved in trading institutions / companies are paid (broker, exchange, clearing house of the stock exchange, clearing bank, and a guarantee fund) for their services. The amount of the guarantee also initial margin, margin, Origin or initial margin called depends on the current price level, the current and / or historical price volatility and the creditworthiness of the dealer. She is usually only a fraction of the contract value and will cover the loss of value that can be sustained per contract within a specified period. An impairment loss occurs when the contract price to the detriment of the position holder changes (either by sale or price increase declining price of purchase). The initial margin described are an integral part of a security system that guarantees the fulfillment of the transactions on exchanges.

13. What do the terms long and short mean?

In commodity futures trading, the holders of long positions as long (in the future) and the positions are referred to as long positions. Analogously, holders of short positions (short positions) short (in the future). The terms can be used also for the trade of physical goods. In this case, farmers producing potatoes or already have in stock and sell them later want as long referred to in the goods. In the cash market are short as Potato processors who have not sold yet produced goods. Therefore, it is advisable to buy futures and hedge against the risk of rising prices, because they are the product eg Processing potatoes not yet possess.

14. What is understood by the daily loss and profit calculations?

From the moment of opening position a profit and loss calculation (mark-to-market method) performed for each purchase and each sale position. An operator has contracts sold (purchased), the growth in value is his account when prices are falling (loss of value) credited the positions (loaded). When prices rise, however, the buyer will receive a credit, while the seller's account is debited. The recorded changes in value are called variation margin. The price changes constantly, to the detriment of the position holder, his account is debited again and again. It has a shortfall on, the position holder will receive a margin call (Margin Call).

15. What is a closeout?

By standardizing the contracts long or short positions may be opened when the corresponding order situation at any time. At the same time, the standardization also allows the reverse process, the closing of positions prior to the maturity of a contract. Since the conclusion and fulfillment of the commodity futures trading - unlike the spot trading on the cash market (eg the delivery of the harvest.) - Time often far apart and contractors is always the accounting office of the Exchange, the commitments made by an offsetting transaction can in the meantime discard again. Experience has shown that even make almost all market participants from the "Closing" mentioned process use. This requires a seller (buyer) prior to maturity contracts according to the number of its open positions to buy (sell) and thus solves its market positions.

16. What does the term Open Interest (OI = Open Interest or Open Positions = OP) mean?

The Open Interest the number of open futures positions is called. If a contract is traded, the trading volume is 1 and the number of open positions is also 1 (a buy and a sell position so together yield the open interest of 1 Represents the seller's position plain, in which he buys and other market participants sold , sales increased to 2, while the open interest remains the same, for now is only one other market participants holder of the short position. since the number of open long positions always corresponds to the open short positions, be either purchased or contracts sold counted.

17. Which obligations have to be fulfilled after the last trading day?

If after the last trading still positions open, so do not close out to date, the holders of open short positions (long) positions in futures must provide with physical settlement a precisely defined quantity and quality of a particular base material of the / those provided for in the specifications place / places (remove and pay). In contrast, are settled (usually price index) for futures with cash settlement (cash settlement) any items that are still open after the last trading day, against a reference price. Since the income balance by this time already held daily, now only the credit or debit of the last day difference occurs at the index to the accounts of participants. The physical so actual delivery is excluded in this process, as satisfying the performance obligation.

18. Which functions do commodity futures exchanges fulfill?

On commodity futures exchanges in the world by numerous market participants and proven capabilities can benefit. These are based on the previously outlined features of commodity futures trading and can be divided into individual companies and macroeconomic functions.

Functions of single operational point of view:

  •      Information improvement (price transparency / -leitfunktion)
  •      Risk reduction (price and reliable costing)
  •      Help raise capital (improving quality)
  •      Investment opportunity (speculation)

Functions from a macroeconomic point of view:

  •      Compensation of temporal or spatial imbalances
  •      promoting competition

19. What do commodity futures exchanges contribute to improve information and what is meant in this context by the price control function?

On stock exchanges the market assessments of many market participants come together in a concise form. The available information is priced into the individual contracts / futures prices. Since these are published by data provider, the Internet and in print media, commodity futures exchanges are suitable to increase market transparency and to homogenize the information level. From a price guide function is called in this context, because the contract prices ideally reflect future market conditions reliably, so that they can be used by companies in the agri-food sector as the basis of their production and marketing decisions. Also, the Future prices can as a reference price for spot or forward transactions in the cash market (EFP - see below: point 24) are used. Anyone can benefit from the advantages of information improvement, without engaging yourself in the stock market. The price transparency thus makes a significant contribution to promoting competition.

20. Which market participants are there in the commodity futures exchange environment and which goals do they pursue?

The market participants in commodity futures markets are generally divided into four groups (hedgers, speculators, arbitrageurs and spread traders). All of them, transactions can be traced back to the motives of risk management and profit, with their weighting of participants is different participants.

  • Hedger: The Hedger market participants are called, opening the stock market positions to hedge against price changes in the goods they want to buy or sell on the spot market in the future. The items are usually resolved at the time the goods flow again. Therefore, such as hedge () business called price protection as a temporary substitution of the existing or expected cash transaction be considered: Someone who continue to sell goods (purchase) would like to sell (buy) this early on in the stock market and later liquidated its first incoming performance obligation. Consequently, a hedger always acts both on the spot market and the commodity futures market. Have hedge transactions to the target that caused the cash market losses are largely offset by increases in value of the stock market positions due to price changes and the hedger thus early pricing and costing accuracy attained (barter).
  • Speculators: Speculators are market participants who take the price / price change risk consciously accepted, because they expect them to profit opportunities. Speculators sell (buy) futures, when they expect falling (rising) prices and speculate on being able to close out this later at a lower (higher) price. Accordingly, they usually have no interest in the possession of the goods and are active almost exclusively in the stock market. Speculators are among the group of people who take the risk of hedgers. With the liquidity provided you provide them thus make an important contribution to the functionality of the market.
  • Arbitrageurs: arbitrageurs seek to exploit temporal or spatial price differences between futures and cash commodity between Future and the simultaneous taking opposing positions in various markets profitably. Taking z. B. a potato dealer arbitrage between two potato futures of different specification front, he sells processing potatoes with the higher price and buy potatoes at the lower rate. The same applies to the arbitrage between futures and cash commodity: you buy eg the cheap goods and sell the more expensive Future. The arbitrage is dissolved from him by into two contracts he makes a compensating counter business later. Is the price difference shrunk over time or omitted, he has made a profit. Arbitrage transactions are less risky in which are used as purely speculative transactions on rising or falling prices. Through their transactions arbitrageurs same temporal and spatial imbalances and thus inevitably bring about a largely uniform pricing.
  • Spread Trader: A spread-trader has to use the target, one expected him to change a price difference between two futures (expansion or convergence) for a profit. Spread traders build offsetting positions on (buying and selling either in the same futures have different terms or in similar futures) and solve this at a later time again. Thus, there are similarities between spread betting and arbitrage. Since Spread traders but usually have no interest in the possession of the goods and their transactions are associated with a higher risk of spread trading can also be regarded as a special form of speculation.

21. How does a price hedge work?

The Hedger replaced at a price hedging an existing or anticipated business with cash commodity temporarily by a substitute transaction in futures. He is someone who is able to sell the goods (purchase) would like to sell (buy) this early on in the stock market and later liquidated its first received performance obligation. Through this transaction, the hedger seeks to ensure that potential losses from the cash position as fully as possible offset by gains from the stock position and can thus calculate in advance at a fixed price (secure margins). But this gain in safety, he also takes into account that higher profits are eaten up in the spot position by the simultaneous loss of value of the futures position. A buyer forfeiting it to profit from falling cash market prices and the salesman gives the opportunity to higher revenues due to rising spot market prices. The operation is described for the buyer (long hedgers) and seller (short-hedgers) explained. Simplicity, it is assumed that the futures price and the spot market price in both examples at the time the flow of goods are the same height.

In summer, a producer of French fries wishes to hedge the purchase price of the processed next Spring processing potatoes to compensate for the risk of rising potato prices. These buys in June at a commodity futures exchange processing potato futures with the maturity of April. The price is 15 € / dt. At the time of the potato purchase on the spot market (end of March / beginning of April), the processors exchange the items received in June of the previous year smooth. If the price is increased over time to 25 € / dt, the frits Manufacturer 25 € / dt for the related cash market potatoes must pay: the high cost price can be offset against the exchange gain of 10 € / dt, so that their purchase price ultimately in June Safe € 15 / dt amounts. 10 € / dt exchange gain resulting from the increase in value of positions that can be best illustrated by a comparison of the opening and the closing price: The factory has total € / dt finishing potato futures in June 15 and in the spring to 25 € / t sold. Had the potato prices have fallen over time at 11 € / dt, this did not alter the final purchase price of 15 € / t. In this case, the factory would indeed only 11 € / t pay to the seller of potatoes, the stock position would have lost time in history 4 € / dt value.

The example of a purchase just described can be applied analogously to the seller of potatoes. Thus, a mail order dealer in the fall had a sales price of 15 € / dt can hedge by selling futures would have with the term of April. In the first scenario, he would get 25 € / dt for the potatoes in the spring of the mill and at the same time a decline in value of its stock market position by 10 € / dt had recorded. In the second scenario, he would have (11 € / dt) can add a stock exchange gain of 4 € / dt added to the sale price of potatoes.

22. What benefit does price hedging have?

The core benefit of price hedging is that companies have the opportunity early on to fix prices for future sales or purchase of goods. Ideally, the economic result of a manufacturing or processing business can thus already be set months in advance as much as possible. The same applies to the future of a margin trading business. The company thereby gain a solid basis for calculation, to which they can adjust their cash flows and lead overall to stabilize its operating results caused. These positive effects are also honored by the banks. Since the riskiness of a loan has significant impact on its design, is risk-reducing management instruments have a reducing effect on the loan terms. In addition, price hedges have a positive effect on the positioning and the marketing opportunities of a company. As trading occurs on commodity futures exchanges anonymously, market participants have the opportunity to complete forward-looking transactions without its marketing partners or competitors gain from this knowledge. In addition, they can liquidate the performance obligation associated with the futures transaction by offsetting position at any time. The futures trading on the futures exchange also has the advantage that, compared to an individual forward contract flexibility is much higher and can therefore react very quickly to new market conditions. Overall, the bundling of supply and demand lowers the search or waiting costs for businesses while increasing their competitiveness. In addition to these advantages, the price hedging can also be used to consolidate or to expand existing and establishing new marketing relationships. Potato traders can spend good time on the basis of price hedging fixed prices to producers and thus these also provide planning security.

23. What is the relationship between the IPO and the cash market price?

Is a close relationship between the spot market price of a commodity and the associated futures prices: In contracts that are settled with an index, as in the EUREX-potato futures, the settlement price on the last trading day of the index. The price difference between the spot price and the index is called the base.

For agricultural products is one you

  •      Quality differences
  •      Transport costs for delivery
  •      Holding costs and
  •      Acquisition and handling costs

to the influence of factors on the base.

The base is specific for the particular region and the given time. It can vary over time and accept both negative and positive values. In terms of price protection it is important to know their own base. The only way to estimate the hedgeable ultimately for the company price. Listed the potato futures contract with the runtime April in January, four months before the due date at 15 € / dt and the average basis of a shipping merchant € -2 / dt, the hedgeable for him Price is 13 € / dt. Consequently Future prices can not 1: 1 transferred to their own company. Furthermore, the effectiveness of a price protection relevant, the value holds the base at the time of closing position. Corresponds to the expected, taken into account in the calculation of a hedger's basis, so it comes to a complete compensation of the losses on the spot market business by increasing the value of the stock position and vice versa. The base changed, however, differs from the result obtained from the calculated. Calculate the potato traders in the example with a base of -2 € / dt, so that he would realize a price of 13 € / t, and the base amounts ultimately to -1 € / dt, it can meet its expectations at a price of 14 € / dt recorded.

The price relationship between markets, in this case between the cash market and the futures market, based on the possibility of arbitrage. Exceeds the Future listing the cash market price for a higher amount than the usual base, a trader could buy potatoes in the spot market and futures on the commodity futures market to sell in order to achieve a nearly riskless profit. Due to its demand in the spot market, the price increases for the physical commodity, while simultaneously pressing his sales on the stock market quotation of futures. So the prices are brought together in the usual difference.

24. What is meant by premium shops (EFP transactions / against actuals)?

Premiums shops combine the advantages of a cash transaction to date (forward contract) with the advantages of price hedging in commodity futures markets. They represent the optimal solution for many contractual relationships. Supplier and the customer (for example., A mail order company and a potato processor) enter into a private law contract of sale, which includes all the essential elements (quality, delivery, delivery quantity, delivery date and price). However, neither a fixed price nor the future spot market price, but the time of delivery, a valid course of the corresponding potato futures is selected Additions / minus a premium (bonus / malus) as a prize. The contractor therefore accept the Future listing as a fair settlement price, so time-consuming, the business may be hazardous, accounting for price negotiations. By the conclusion they generate early sales or reference security. In addition, they gain resulting from a price-hedging price and calculation reliability, since a premium business provides, at the time of delivery of goods in an appropriate amount exchange exchange contracts. Accordingly, build market positions both buyers and sellers over time, where they select for independent from the beneficiary a reasonable time for them. Thus, it is the buyer possible to realize through the clearing with exchange trading a purchase price that is lower than the price the seller ultimately achieved for its potatoes. The names EFP-business (Exchange of Futures for Physicals) as well as against actuals resulting from the described exchange of futures positions at the time of delivery. Through this exchange, the stock market positions and thus the fulfillment of obligations of both parties are liquidated. Since the position disposals, are made independently of other market participants, playing the market depth of the market for both parties after the opening position no longer matters. The same applies to possible base changes since the base is determined by the particular in the private contract premium.

25. Which products are also listed on commodity futures exchanges apart from futures ?

In addition to other products futures are traded on the major futures exchanges. For the agricultural sector, the relevant group is the closest of the options, which is briefly outlined below.

The holder of an option has the right but not the obligation, within the term of the option to buy a futures contract at a specified price (call) or sell (put). It indirectly creates the right to refer the Future underlying commodity or supply. The advantage of options is to allow the option to expire also. For the buyer of a put (call) therefore remains the opportunity to benefit from rising (falling) cash market prices. The risk of loss is thus limited to the option price.