For example, Saburo was the owner of rice balls in the Edo era, but the atmosphere of war has become more and more intense recently. Saburo was worried that the price of rice would soar when the war broke out, and eventually he would not have enough money to buy rice to make rice balls. Therefore, Saburo decided to buy this batch of rice from rice merchants at the current price before the next rice harvest! Therefore, Saburo paid the deposit to the rice merchant and signed the contract of "purchasing future white rice", which is the predecessor of futures.
The biggest difference between futures and spot is that:
cash deposit
On-day margin settlement
Physical delivery is usually not required after maturity.
As long as you remember these three points, you can understand futures well.
Margin: (Kuanke Online) Saburo wanted to order rice for three months, so he agreed to buy a ton of rice for three months at the price of 1000/ ton and signed a contract. Saburo Tai and the rice merchant didn't pay the deposit.
Three months later, the price of rice fell to 950/ ton. Saburo thinks that if he doesn't fulfill the contract and buys rice from others, the price will be 50 pounds cheaper. So he decided to break the contract and buy rice from others. As a result, Saburo made 50 pounds, while the rice merchant lost 50 pounds. Because Saburo didn't pay the deposit when signing the contract, the rice merchant had to bear the losses himself.
In order to ensure that there will be no breach of contract, Saburo Tai and Mi Shang decided to take out a certain percentage of the total amount as a deposit when signing the contract and give it to the village head for notarization. No matter which party breaches the contract, the deposit belongs to the other party.
So Saburo happily signed a contract with the rice merchant, and each of them took out a deposit of 10% of the total amount, that is, 100. Is there a problem now?
After three months, the price of rice fell to 500/ ton. Saburo thought that if he broke the contract, he would lose the deposit of 100, but he could buy rice cheaply in 500 yuan. In general, he still earned 400 yuan, so Saburo chose to break the contract again. Because the down payment (100) paid by Saburo when signing the contract was not enough to make up for the loss (500) of the rice merchant, the rice merchant had to bear the loss himself.
In other words, the deposit system alone cannot prevent the breach of contract.
In order to better enable both parties to perform the contract, the village head came up with a second method, that is, the system of settling the deposit on the same day.
Now from the beginning, Saburo signed a contract with the rice merchant, and Saburo Tai and the rice merchant each paid a deposit of 100.
Who would have thought that the price of rice would drop to 900/ ton after the first day? The village chief thinks that Saburo's loss is the same as his current deposit. If rice prices fall again tomorrow, Saburo will definitely default. So the village chief deducted 100 from Saburo's deposit and gave it to the rice merchant, and updated the contract to read: Three months later, Saburo paid the rice merchant 900 yuan to buy 1 ton of rice.
Saburo calculated and found that the village chief's practice did not affect his interests (Kuanke Online):
The rice merchant also calculated and found that the village chief's practice did not affect his own interests (Kuanke Online):
However, Saburo found that his deposit was zero. In order to continue to perform the contract, he must make up the deposit of 10% of the contract amount before tomorrow, that is, 900 x 10%=90.
After Saburo pays the deposit, if the rice price continues to fall tomorrow, the village head will repeat the above practice to ensure that both parties cannot avoid losses through breach of contract.
(Kuanke Online) Two months later, the rice ball shop in Saburo closed down due to poor management. At this time, the price of a ton of rice is still 1050/ ton. Saburo thought: I no longer need this ton of rice, and there is no reason to perform the contract, but if I choose to breach the contract, I will lose the deposit of 100. What should I do?
As it happens, Saburo's neighbor Ji Yong opened a restaurant. Ji Yong wanted to order rice a month later, so the village head arranged for Ji Yong to sign a contract with Saburo, stipulating that Ji Yong would pay Saburo 1050 to buy 1 ton of rice a month later.
By signing a futures contract to sell rice, Saburo offset the futures contract to buy rice and made a net profit of 50% without physical delivery.
Saburo found that he only needed 10% to close the transaction, and this leverage operation made the income fluctuate greatly. Saburo began to learn to buy rice futures at low prices and sell rice futures at high prices. He became a speculator and reached the peak of his life.
Summary (Kuanke Online):
Saburo buys rice futures → opens positions.
Saburo holds rice futures until the contract expires → holds positions.
When the contract expires, Saburo will pay for the rice and deliver it.
Before the contract expires, Saburo sells the contract (rice) to others → liquidates the position.