Selling (Going Short) Aluminum Futures to Profit from a Fall in Aluminum Prices

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Precious metals investment terms A to Z

Short Selling (also known as “going short” or simply “shorting”) is a way of profiting on lower prices. It’s the practice of selling borrowed (from the broker) assets, with the aim to buy them back later and return to the lender. Short sellers assume that they will be able to buy the stock back at a lower price than they sold short and thus profit.

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Gold Short Selling

The gold short seller profits if the price of the borrowed gold or security goes down – in this situation the investor is able to buy it (gold or other security) back at a lower price. The investor incurs losses if gold’s or this other security’s price goes up – the investor has to spend a bigger amount of money for the buyback. There is no limit to the losses that can be incurred while selling gold short (the price can theoretically rise infinitely), but the potential gain is limited (the price of gold or stock can fall to zero at the most). Going short may also refer to buying a derivative, where the investor profits from the fall in price of the underlying asset such as gold.

Naked Gold Short Selling

Naked short means selling short a security or some other asset like gold without having the asset. For instance, if you sell futures contracts for silver buy you don’t have silver to back up the position. If you had that silver, your losses on the futures contract would be offset by gains on the physical metal. Therefore, this position would be called a hedged (or covered) short futures position. However, if you would sell a futures contract for silver without having silver in the first place, then this position would be purely speculative and since this contract would not be backed by any asset, the position would be called “naked”.

A Brief History of Short Selling

Legend has it that the practice of short selling was invented at the beginning of 17th century by Dutch merchant Isaac Le Maire. It has been a source of controversy and criticism ever since. Shorting East India Company stocks in the 18th century by the London-based banking house Neal, James, Fordyce and Down led to a major crisis, resulting in the collapse of the vast majority of private banks in Scotland and a huge liquidity crisis. Short selling is also responsible for magnifying the Dutch Tulip Crisis.

The term “short” has been used since the middle of the nineteenth century. Short sellers were blamed for the crash of 1929 and this led to the implementation of laws governing short selling. In 1949 a fund that bought some stocks while selling others short hedged some of the market risk – this was the beginning of hedge funds.

Risks of Short Selling

  • No dividend or interest income – contrary to going long, return is taxed only as a capital gain.
  • Limited potential gains, unlimited potential losses – the price of a security can decrease at most to zero (100% potential profit, if going short), but it can increase theoretically infinitely (in this case potential loss of going short is unlimited).
  • A stockbroker may cover (end) a position if the price of the underlying stock rockets without the knowledge of a client in order to guarantee returning borrowed stock.
  • When the stock price rises, some investors who went short decide to cover their positions by buying back stocks thus fueling further price increase.
  • A stock may be “hard to borrow” – a stockbroker may charge an additional “hard to borrow” fee for every day the Securities and Exchange Commission (SEC) declares that the stock is “hard to borrow”.
  • The stockbroker requires a margin account and charges interest, in order to limit the credit risk.

Costs of Going Short

  • Fee for delivering the borrowed stocks – usually it is a commission similar to that of buying a stock.
  • All the dividends are paid to the lender from the account of the person going short.
  • For some brokers the investor going short does not earn interest on the proceeds from short sale.

Buying a Put Option

A very convenient way of going short is by buying a put option, as it limits the short’s potential loss. It is a contract between two parties to exchange some specified asset at a specified price by (in the case of an American option) or on (in the case of a European option) a specified date. The buyer of the put option has the right, but not the obligation, to sell the asset at this specified price and the seller has to buy this asset, if the buyer sells it. If the spot price at the specified future date is significantly lower than the strike of the option, buyers of the options make a profit – they have the right to sell the asset at a price higher than the market price.

We hope you enjoyed reading the above definition of gold short selling. If you’d like to learn more about gold in particular about its most recent price swings and their implications (is it a good time to short gold?), we invite you to sign up for our gold newsletter. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today .

Put Options

A derivative that provides you with leverage during downtrends, while limiting your risk. The catch is that you have to be right on time.

Short-term Trades

Short-term trades are trades that terminate within a short period from their inception. They can be very profitable, but they are also very risky.

Trend

Trend is the general direction – up, down or sideways – in which the price of an asset is heading for a prolonged period of time.

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Aluminium: Prices capped, for now

While the aluminium market is set to see yet another large ex-China deficit, broader macro concerns, the lifting of sanctions, falling input costs and weaker premiums have capped the market for now

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ING aluminium price forecast

The Rusal effect

US sanctions against Russian aluminium producer, Rusal was the key driver behind increased volatility in the market over much of 2020. This was no surprise, given that the company is the largest producer outside China, making up around 13% of total ex-China supply. However as the year progressed it became clear that the US Treasury and Rusal were both keen to come to a deal which would see the lifting of Rusal sanctions. The US Treasury finally announced its intention to remove sanctions against Rusal in December, and these were successfully lifted on 27 January, despite attempts from US Democrats to block this move.

Despite it being largely expected that sanctions would be removed, confirmation of the news has put renewed pressure on LME aluminium. The concern is that unsold Rusal stock would now weigh on the market. However when looking at Rusal production over 2020, along with sales, the build-up in inventory over the year does not appear to be significant. Rusal output totalled 3.75mt over the year, whilst sales totalled 3.67mt – leaving a stock build of 82kt. Still the concern is that, following the lifting of LME restrictions, some of this material could make its way into LME warehouses, .

The lifting of Rusal sanctions does not change our outlook for the market. We were assuming that these sanctions would be lifted, and so see litttle impact in terms of supply. We are still estimating that the ex-China market will see a sizeable deficit over 2020. But clearly the Rusal decision has weighed on sentiment in the short term.

Rusal quarterly aluminium output and sales (000 tonnes)

Premium weakness

Another factor clearly weighing on sentiment is fairly weak premiums. European premiums have edged lower for several months now – US tariffs are not helping regional premiums elsewhere, whilst the threat of Rusal material is also weighing on premiums. Weaker premiums have not been supportive for the market, with this doing little to stop the inflow of material into LME warehouses. Since early December LME inventories have increased from 1.04mt to around 1.3mt.

In Asia, premiums have also been weaker, Japanese spot premiums are trading at around US$77/t, down from over US$90/t in October. Japanese buyers have agreed quarterly premiums for 1Q19 of US$83-85/t, compared to US$103/t in the previous quarter.

However, in the US the Midwest premium remains well supported. This shouldn’t come as too much of a surprise given the 10% tariff that was introduced under section 232.

LME aluminium inventories edge higher

Bloomberg, ING Research

Easing cost pressures

One of the key themes over much of last year, was the fact that smelter margins were getting squeezed. Producers were having to deal with rising input costs, with both energy and alumina prices strengthening over much of the year. This pressures have eased somewhat. Looking at the coal market, API2 coal prices have fallen around 25% since late October.

Meanwhile on the alumina side, the lifting of Rusal sanctions has also provided clarity over Rusal’s alumina supply. Additionally over the course of 2020 China switched from a net importer of alumina to a net exporter, with attractive prices on offer in the world market. Finally the market is moving more towards the view that the Alunorte alumina refinery in Brazil will return to full operations at some stage this year, which should keep the alumina market well supplied. This has seen alumina prices falling from levels as high as US$640/t over parts of 2020 to around US$370/t currently. The alumina/aluminium price ratio has fallen from a peak of 31% in September 2020 to 19% currently.

However we do believe that the market may be too complacent around alumina supply, especially with the return of full operations at the Alunorte refinery in Brazil. Following the unfortunately fatal Vale dam accident, regulatory pressures are likely to grow for the metals and mining industry in Brazil. Therefore the government may be hesitant to give the final go ahead to Hydro at the moment.

Alumina/aluminium price ratio edges lower

Bloomberg, ING Research

Ex-China vs China supply

The aluminium market has a structural issue – the bulk of current supply growth is coming from China, whilst ex-China growth is still falling short of the level needed to fill the ex-China deficit.

Over 2020 Chinese primary production grew by 580kt to hit a record 36.49mt. This stronger production comes despite winter cuts, and the shutting of “illegal” capacity in the summer of 2020. Meanwhile the story of restarts and new capacity has been more an ex-China one – output over 2020 only increased by around 350kt. Outages and tighter smelter margins over 2020 did little to support the needed growth in production outside China.

Expectations are that we will once again see a large ex-China deficit – somewhere in the region of 1.8mt. Meanwhile the Chinese surplus is forecast to be in the region of 300kt, leaving a global deficit of around 1.5mt. The size of this will depend on how well demand holds up over the course of the year, especially in the current environment.

Aluminum Recycling Prices: Aluminum Scrap Price per Pound + More

Short Answer: Aluminum scrap prices fluctuate regularly due to constant changes in the commodities market. Typically, you can expect aluminum prices to fluctuate between around $.50 to over $1 per pound. Aluminum is the most recycled metal on the planet due to its lightweight nature and widespread use in ordinary objects like beverage cans, food cans, and appliances. Below, we have the details of how aluminum prices are determined, where to find aluminum scrap, and how to sell your scrap aluminum.

Table of Contents

Historical Aluminum Prices per Pound

According to the Aluminum Association, Americans throw away more than $700 million worth of aluminum cans every year. Not only is recycling better for the environment, but the aluminum going to the landfill could instead be money in your pocket.

Scrap aluminum prices vary from a few cents from day to day with significant changes taking place over a monthly or yearly period. If you’re considering selling scrap aluminum, take a look at the daily chart as well as the historical data to determine if it is the best time to sell.

We’ve summarized some of the available information about aluminum prices below to give you the big picture overview of the prices ranges you can expect.

Historical Aluminum Prices

The average price for aluminum throughout 2020 fluctuated between $2,200 and $1,900 per ton (which translates to around $1.10 to $0.95 per pound). As of September 2020, the price is hovering at just below $1,800 per ton.

  • Five-year (2020):
    • High: $1.15 per pound
    • Low: $0.73 per pound
    • Average: $0.92 per pound
  • 10-year (2008-2020):
    • High: $1.53 per pound
    • Low: $0.66 per pound
    • Average: $0.99 per pound
  • 20-year (1998-2020):
    • High: $1.53 per pound
    • Low: $0.59 per pound
    • Average: $0.93 per pound

What Factors Affect Aluminum Scrap Prices?

The historical data above shows different prices per pound for aluminum throughout time. Aluminum, like copper, steel, and coal, is a commodity. Its pricing is determined by five main factors affecting commodities: demand, supply, government trade policies, the value of the U.S. dollar, and investment fund value. With these factors in constant flux, the per-pound value of aluminum is also subject to change regularly.

For the most current prices, you can visit InvestmentMine’s one week chart, which shows the weekly trend of aluminum prices to help you gauge the peak time to sell. Remember that scrap yards likely won’t pay you the full market value of your aluminum haul; you’ll typically be offered around 30% to 50% of the current price per pound. Be sure to factor that in when you’re determining how much you expect to make with your scrap aluminum.

You can also examine the World Bank’s price forecasts for aluminum. World Bank maintains forecasts for a wide variety of commodity markets.

Where to Find Aluminum Scrap

The most widely available source of aluminum scrap is wherever there are soda or beer cans. You can also find aluminum in other packaging such as pet food cans, canned food products like tuna or Vienna sausages, and aerosol cans.

A standard 12-ounce soda can weighs about half an ounce. It will take 32 standard soda cans to equal one pound. It may be a good idea to save up a few pounds of cans while monitoring aluminum scrap prices per pound in order to get the best payout.

Another source of aluminum is household appliances. Appliances such as washers and dryers, refrigerators, freezers, ovens, and ranges all contain aluminum. These items will require a little more effort to transport and unload but can net a larger payment in a single transaction. Some scrap facilities will even pick up larger items from you. It is worth noting, however, that minor disassembly is required with these items and Freon must be removed from refrigerators and freezers by a professional.

How to Identify Aluminum

Aluminum is typically easy to identify because it’s much lighter than most other metals. If you have a food or drink container that looks like metal and feels light for its size and shape, it’s almost certain you’re holding aluminum. In larger appliances, aluminum is sometimes mistaken for steel. You can check whether the metal is aluminum or steel with a few simple tests:

  • Does a magnet stick to it? Aluminum is not magnetic, so if a magnet sticks to the metal, it’s steel or some other ferrous metal.
  • Does it have any rust? Aluminum corrodes, but does not rust, while steel may rust if exposed to severe conditions for a long period.
  • Is it heavy? Aluminum is three times lighter than steel, so if it feels noticeably light, it’s likely to be aluminum.

If the metal that you have does turn out to be stainless steel, you can see our article about scrap stainless steel prices.

Where to Sell Aluminum

There are a few different ways to get rid of scrap aluminum, depending on how quickly you want to get rid of it and how much you would like to be paid. We have the details below.

Commercial Scrap Yards

Commercial scrap yards will buy scrap metal from individuals, businesses, and contractors, typically at a percentage of the current list price of aluminum per pound. You can expect a commercial scrap yard to offer 30% to 50% of the current price per pound for aluminum. Commercial scrap yards will either pay in cash or load a debit card with the payout amount.

Usually, the payout at a commercial scrap yard is immediate, but some will require a waiting period to ensure the items you’re selling aren’t stolen goods. Be prepared to show some form of personal identification as part of the safeguards against the sale of stolen items.

Grocery Stores or Deposit Redemption Centers

If you live in a state with Container Deposit Laws, you can return empty aluminum beverage cans to most grocery stores or deposit redemption centers for $0.05 to $0.15 each, depending on the state law. Payouts at grocery stores and redemption centers are given as soon as your aluminum cans are counted. Each grocery store or redemption center has its own method of payout, but most will give a cash voucher or electronic funds account that can be applied to grocery bills or donated to charitable causes.

The states and territories with Container Deposit Laws are:

  • California
  • Connecticut
  • Hawaii
  • Iowa
  • Maine
  • Massachusetts
  • Michigan
  • New York
  • Oregon
  • Vermont
  • Guam

Many of these states will pay for glass or plastic containers, too.

For the details on Fred Meyer’s bottle return hours, see our article.

City or County Governments

Many county or city governments have programs in place to encourage recycling with a monetary reward. Often these programs include turning in old appliances for an energy bill rebate or similar programs to offset an existing monthly bill. Utility companies such as PNM, Xcel Energy, FirstEnergy, DTE Energy, and Pepco all offer $50 for old refrigerators and freezers and some offer additional money for other appliances. Usually, the payout is applied to your monthly energy bill rather than cash in hand.

Check with your local city or county government or your utility company to see if they offer recycling rebates and to set up an appointment for pick-up.

Local Recycling Centers

If you aren’t concerned about getting paid for your scrap aluminum, you can always take it to a local recycling center. I Want To Be Recycled provides a directory for users to locate a recycling facility near them and includes information about what can and cannot be recycled.

Tips for Selling Scrap Aluminum

Here are a few tips to help you get the most for scrap aluminum:

Stock Up

Make the trip worth your while. Since most scrap yards pay by the pound, it can be better to wait to sell until you have a few pounds collected. Some scrap yards will have a minimum amount required for processing.

Consolidate Space

Crush collected aluminum cans as you acquire them. Crushing your collected aluminum cans will save room on storage and make it easier to transport them to the scrap yard.

Make Sure Items Are Clean

Rinse out and dry your collected cans. Many scrap yards will charge a fee if you bring in dirty or filled metal containers to be sold. If you’re amassing a large batch of scrap aluminum at your property before bringing it to the scrap facility, clean containers will also store better and keep critter infestations at bay.

Know the Law

Some cities have ordinances against collecting discarded aluminum cans in residential neighborhoods or in city parks. Always check your local laws and ordinances to avoid being ticketed or fined.

In Summary

Scrap aluminum is plentiful and easily recycled or sold for cash. Aluminum prices fluctuate with the commodities market, but you can typically expect prices to fall between around $0.50 to over $1.00 per pound. Scrap yards will typically pay 30% to 50% of the market price. Check the daily price trends and call around to local scrap dealers or salvage yards to find the best deal. You can also bring your scrap aluminum beverage cans to a redemption center if you live in a state with Container Deposit Laws. Beverage cans will net you between $0.05 to $0.15 each at a redemption center, depending on the state.

For more information on the prices you’ll get for scrap metal, see our articles on copper, brass, iron, and lead.

Shareholders

Stock markets are measured by stock indexes (or indices), such as the Dow Jones Industrial Average (DJIA) in New York, and the FTSE 100 index (often called the Footsie) in London. These indexes show changes in the average prices of a selected group of important stocks. There have been several stock market crashes when these indexes have fallen considerably on a single day (e.g. ‘Black Monday 5 , 19 October 1987, when the DJIA lost 22.6%).

Financial journalists use some animal names to describe investors:

■ bulls are investors who expect prices to rise

■ bears are investors who expect them to fall

■ stags are investors who buy new share issues hoping that they will be over-subscribed. This means they hope there will be more demand than available stocks, so the successful buyers can immediately sell their stocks at a profit.

A period when most of the stocks on a market rise is called a bull market. A period when most of them fall in value is a bear market.

Dividends and capital gains

Companies that make a profit either pay a dividend to their stockholders, or retain their earnings by keeping the profits in the company, which causes the value of the stocks to rise. Stockholders can then make a capital gain – increase the amount of money they have – by selling their stocks at a higher price than they paid for them. Some stockholders prefer not to receive dividends, because the tax they pay on capital gains is lower than the income tax they pay on dividends. When an investor buys shares on the secondary market they are either cum div, meaning the investor will receive the next dividend the company pays, or ex div, meaning they will not. Cum div share prices are higher, as they include the estimated value of the coming dividend.

Institutional investors generally keep stocks for a long period, but there are also speculators – people who buy and sell shares rapidly, hoping to make a profit. These include day traders – people who buy stocks and sell them again before the settlement day. This is the day on which they have to pay for the stocks they have purchased, usually three business days after the trade was made. If day traders sell at a profit before settlement day, they never have to pay for their shares. Day traders usually work with online brokers on the internet, who charge low commissions – fees for buying or selling stocks for customers. Speculators who expect a price to fall can take a short position, which means agreeing to sell stocks in the future at their current price, before they actually own them. They then wait for the price to fall before buying and selling the stocks. The opposite – a long position – means actually owning a security or other asset: that is buying it and having it recorded in one’s account.

June 1: Sell 1,000 Microsoft stocks, to be delivered June 4, at current market price: $26.20 June 3: Stock falls to $25.90. Buy 1,000

June 4: Settlement day. Pay for 1,000 stocks @ $25.90, receive 1,000 x $26.20. Profit $300

A short position

31.1 Label the graph with words from the box. Look at A opposite to help you.

bull market crash

1984 1985 1986 1987 1988

31.2 Answer the questions. Look at A, B and C opposite to help you.

1 How do stags make a profit?

2 Why do some investors prefer not to receive dividends?

3 How do you make a profit from a short position?

31.3 Make word combinations using a word or phrase from each box. Some words can be used twice. Then use the correct forms of the word combinations to complete the sentences below. Look at B and C opposite to help you.

make a capital gain
own a dividend
pay earnings
receive a position
retain a profit
take securities
tax

1 I. less. on capital gains

than on income. So as a shareholder, I prefer

not to. a. If the

company. its. , I can

selling my shares at a profit instead.

2 Day trading is exciting because if a share price

falls, you can. a. by

. a short. But it’s risky

Would you like to be

selling. that you don’t even

The sculpture of a bull near the New York Stock Exchange

a day trader? Or would you be frightened of taking such risks?

Influences on share prices

Share prices depend on a number of factors:

■ the financial situation of the company

■ the situation of the industry in which the company operates

■ the state of the economy in general

■ the beliefs of investors – whether they believe the share price will rise or fall, and whether they believe other investors will think this.

Prices can go up or down and the question for investors – and speculators – is: can these price changes be predicted, or seen in advance? When price-sensitive information – news that affects a company’s value – arrives, a share price will change. But no one knows when or what that information will be. So information about past prices will not tell you what tomorrow’s price will be.

There are different theories about whether share price changes can be predicted.

■ The random walk hypothesis. Prices move along a ‘random walk’ – this means day-to­day changes arc completely random or unpredictable.

■ The efficient market hypothesis. Share prices always accurately or exactly reflect all relevant information. It is therefore a waste of time to attempt to discover patterns or trends – general changes in behaviour – in price movements.

Head and shoulders pattern

■ Technical analysis. Technical analysts are people who believe that studying past share prices does allow them to forecast future price changes. They believe that market prices result from the psychology of investors rather than from real economic values, so they look for trends in buying and selling behaviour, such as the c head and shoulders’ pattern.

■ Fundamental analysis. This is the opposite of technical analysis: it ignores the behaviour of investors and assumes that a share has a true or correct value, which might be different from its stock market value. This means that markets are not efficient. The true value reflects the present value of the future income from dividends.

Analysts distinguish between systematic risk and unsystematic risk. Unsystematic risks are things that affect individual companies, such as production problems or a sudden fall in sales. Investors can reduce these by having a diversified portfolio: buying lots of different types of securities. Systematic risks, however, cannot be eliminated in this way. For example market risk cannot be avoided by diversification: if a stock market falls, all the shares listed on it will fall to some extent.

32.1 Match the two parts of the sentences. Look at A and B opposite to help you.

1 The random walk theory states that

2 The efficient market hypothesis is that

3 Technical analysts believe that

4 Fundamental analysts believe that

a studying charts of past stock prices allows you to predict future changes,

b stocks are correctly priced so it is impossible to make a profit by finding undervalued ones,

c you can calculate a stock’s true value, which might not be the same as its market price,

d it is impossible to predict future changes in stock prices.

32.2 Are the following statements true or false? Find reasons for your answers in B and C opposite.

1 Fundamental analysts think that stock prices depend on psychological factors – what people think and feci – rather than pure economic data.

2 Fundamental analysts say that the true value of a stock is all the income it will bring an investor in the future, measured at today’s money values.

3 Investors can protect themselves against unknown, unsystematic risks by having a broad collection of different investments.

4 Unsystematic risks can affect an investor’s entire portfolio.

32.3 Match the theories (1-3) to the statements (a-c). Look at B opposite to help you.

1 fundamental analysis

2 technical analysis

3 efficient market hypothesis

Share prices are correct at any given time. When new information appears,

they change to a new correct price.

By analysing a company, you can determine its real value. This sometimes allows you to make a profit by buying underpriced shares.

It’s not only the facts about a company that matter: the stock price also depends on what investors think or feel about the company’s future.

Do you believe that it is possible to find undervalued stocks, predict future price and regularly get returns that are higher than the stock market average?

Government and corporate bonds

Bonds are loans to local and national governments and to large companies. The holders of bonds generally receive fixed interest payments, once or twice a year, and get their money – known as the principal – back on a given maturity date. This is the date when the loan ends.

Governments issue bonds to raise money and they are considered to be a risk-free investment. In Britain government bonds are known as gilt-edged stock or just gilts. In the US they are called Treasury notes, which have a maturity of 2-10 years, and Treasury bonds, which have a maturity of 10-30 years. (There are also short-term Treasury bills which have a different function: see Units 25 and 27.)

Companies issue bonds, called corporate bonds, because they can usually pay less interest to bondholders than they would have to pay if they raised the same money by a bank loan. These bonds are generally safer than shares, because if a company cannot repay its debts it can be declared bankrupt. If this happens, the creditors can force the company to stop doing business, and sell its assets to repay them. In this way, bondholders will probably get some of their money back.

Borrowers – the companies issuing bonds – are given credit ratings by credit agencies such as Standard & Poor’s and Moody’s. This means that they are graded, or rated, according to their ability to repay the loan to the bondholders. The highest grade (AAA or Aaa) means that there is almost no risk that the borrower will default – fail to pay interest or to repay the principal. Lower grades (e.g. Baa, BBB, C, etc.) mean an increasing risk of the borrower becoming insolvent – unable to pay interest or repay the capital.

Prices and yields

Bonds are traded by banks which act as market makers for their customers, quoting bid and offer prices with a very small spread or difference between them. (See Unit 30) The price of bonds varies inversely with interest rates. This means that if interest rates rise, so that new borrowers have to pay a higher rate, existing bonds lose value. If interest rates fall, existing bonds paying a higher interest rate than the market rate increase in value. Consequently the yield of a bond – how much income it gives – depends on its purchase price as well as its coupon or interest rate. There are also floating-rate notes – bonds whose interest rate varies with market interest rates.

Other types of bonds

When interest rates are high, some companies issue convertible shares or convertibles, which are bonds that the owner can later change into shares. Convertibles pay lower interest rates than ordinary bonds, because the buyer gets the chance of making a profit with the convertible option.

There are also zero coupon bonds that pay no interest but are sold at a big discount on their par value, which is 100%, and repaid at 100% at maturity. Because they pay no interest, their owners don’t receive money every year (and so don’t have to decide how to reinvest it); instead they make a capital gain at maturity.

Bonds with a low credit rating (and a high chance of default), but paying a high interest rate, are called junk bonds. Some of these are known as fallen angels – bonds of companies that were previously in a good financial situation, while others are issued to finance leveraged buyouts. (See Unit 40)

BrE: convertible share; AmE: convertible bond

33.1 Match the words in the box with the definitions below. Look at A and B opposite to help you.

coupon maturity date
credit rating principal
gilt-edged stock Treasury bonds
default Treasury notes
insolvent yield

1 the amount of capital making up a loan

2 an estimation of a borrower’s solvency or ability to pay debts

3 bonds issued by the British government

4 non-payment of interest or a loan at the scheduled time

5 the day when a bond has to be repaid

6 long-term bonds issued by the American government

7 the amount of interest that a bond pays

8 medium-term (2-10 year) bonds issued by the American government

9 the rate of income an investor receives from a security 10 unable to pay debts

33.2 Are the following statements true or false? Find reasons for your answers in A, B and C opposite.

1 Bonds are repaid at 100% when they mature, unless the borrower is insolvent.

2 Bondholders are guaranteed to get all their money back if a company goes bankrupt.

3 AAA bonds are a very safe investment.

4 A bond paying 5% interest would gain in value if interest rates rose to 6%.

5 The price of floating-rate notes doesn’t vary very much, because they always pay market interest rates.

6 The owners of convertibles have to change them into shares.

7 Some bonds do not pay interest, but are repaid at above their selling price.

8 Junk bonds have a high credit rating, and a relatively low chance of default.

33.3 Answer the questions. Look at A, B and C opposite to help you.

1 Which is the safest for an investor?

A a corporate bond B a junk bond C a government bond

2 Which is the cheapest way for a company to raise money?

A a bank loan B an ordinary bond C a convertible

3 Which gives the highest potential return to an investor?

A a corporate bond B a junk bond C a government bond

4 Which is the most profitable for an investor if interest rates rise?

A a Treasury bond B a floating-rate note C a Treasury note

Is this a good time to buy bonds? Why/why not?

Forward and futures contracts are agreements to sell an asset at a fixed price on a fixed date in the future. Futures are traded on a wide range of agricultural products (including wheat, maize, soybeans, pork, beef, sugar, tea, coffee, cocoa and orange juice), industrial metals (aluminium, copper, lead, nickel and zinc), precious metals (gold, silver, platinum and palladium) and oil. These products are known as commodities. Futures were invented to enable regular buyers and sellers of commodities to protect themselves against losses or to hedge against future changes in the price. If they both agree to hedge, the seller (e.g. an orange grower) is protected from a fall in price and the buyer (e.g. an orange juice manufacturer) is protected from a rise in price.

Futures are standardized contracts – contracts which are for fixed quantities (such as one ton of copper or 100 ounces of gold) and fixed time periods (normally three, six or nine months) – that are traded on a special exchange. Forwards are individual, non- standardized contracts between two parties, traded over-the-counter – directly, between two companies or financial institutions, rather than through an exchange. The futures price for a commodity is normally higher than its spot price – the price that would be paid for immediate delivery. Sometimes, however, short-term demand pushes the spot price above the future price. This is called backwardation.

Futures and forwards are also used by speculators – people who hope to profit from price changes.

More recently, financial futures have been developed. These are standardized contracts, traded on exchanges, to buy and sell financial assets. Financial assets such as currencies, interest rates, stocks and stock market indexes fluctuate – continuously vary – so financial futures are used to fix a value for a specified future date (e.g. sell euros for dollars at a rate of € 1 for $1.20 on June 30).

■ Currency futures and forwards are contracts that specify the price at which a certain currency will be bought or sold on a specified date.

■ Interest rate futures are agreements between banks and investors and companies to issue fixed income securities (bonds, certificates of deposit, money market deposits, etc.) at a future date.

■ Stock futures fix a price for a stock and stock index futures fix a value for an index (e.g. the Dow Jones or the FTSE) on a certain date. They are alternatives to buying the stocks or shares themselves.

Like futures for physical commodities, financial futures can be used both to hedge and to speculate. Obviously the buyer and seller of a financial future have different opinions about what will happen to exchange rates, interest rates and stock prices. They are both taking an unlimited risk, because there could be huge changes in rates and prices during the period of the contract. Futures trading is a zero-sum game, because the amount of money gained by one party will be the same as the sum lost by the other.

34.1 Match the words in the box with the definitions below. Look at A opposite to help you

backwardation commodities forwards futures
to hedge over-the-counter spot price

1 the price for the immediate purchase and delivery of a commodity

2 the situation when the current price is higher than the future price

3 adjective describing a contract made between two businesses, not using an exchange

4 contracts for non-standardized quantities or time periods

5 physical substances, such as food, fuel and metals, that can be bought or sold with futures contracts

6 to protect yourself against loss

7 contracts to buy or sell standardized quantities

34.2 Complete the sentences using a word or phrase from each box. Look at A and B opposite to help you.

u banks v companies w farmers

A Commodity futures allow B Interest rate futures allow C Currency futures allow

x food manufacturers y importers z investors

1 to charge a consistent price for their products.

2 to be sure of the rate they will get on bonds which could be

issued at a different rate in the future.

3 to know at what price they can borrow money to finance

4 to make plans knowing what price they will get for their crops.

5 to offer fixed lending rates.

6 . to remove exchange rate risks from future international

34.3 Are the following statements true or false? Find reasons for your answers in B opposite.

1 Financial futures were created because exchange rates, interest rates and stock prices all regularly change.

2 Interest rate futures are related to stocks and shares.

3 Financial futures contracts allow companies to protect themselves against short-term changes in exchange rates.

4 You can only hedge if someone who expects a price to move in the opposite direction is willing to buy or sell a contract.

5 Both parties can make money out of the same futures contract.

Look at some commodity prices, and decide if you think they will rise or fall over the next three months. Check in three months 1 time to see if you would have made or lost money by buying or selling futures.

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