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

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What I Learned From Quitting Coffee After 15 Years Of Daily Consumption

I used to drink coffee on a daily basis since I was a teenager.

Every now and then I toyed with the idea of drinking less coffee, but I never made an attempt at giving it up. Tolerance develops quickly when you drink it regularly and I hadn’t felt the waking effect in a long time. I drank coffee for no particular reason other than having come to like its taste.

Two weeks ago I stopped cold turkey. Here’s the backstory, how I did it, and what I noticed since making the change.

Rising Consumption

Coffee had been my constant companion since I was a teenager. At home, in school, at the university. I was hooked on the stuff early on, partly because my parents used to drink the black energy liquid one cup after the other when I grew up.

It was normal to drink coffee. For breakfast, after and during lunch or dinner, or in-between whenever one felt like it. We would walk over to the machine, place a cup under the dispenser and wait for the rhythmic noises in anticipation of the delicious odor that would soon fill the air. Coffee was my family’s hot beverage of choice. It was the default option.

In high school, we had coffee machines at the canteen and I would pour myself a cup whenever I had the chance to do so.

During the first years at the university, I regularly drank coffee from vending machines around the campus, but it was during my Master’s that I increased my consumption even more. I picked up the idea that ‘ science is fueled by caffeine’ and made sure to be part of it.

After starting my PhD I introduced a bunch of changes to my life and built several habits. In the course of this, I restricted myself to drink only four cups of coffee per day.

This held up for about three years. There have been exceptions of course: One day during a road trip in Arizona with friends, I bought a 1.5 liter bottle of unsweetened Starbucks espresso in a grocery store. While driving that day, I kept sipping from that bottle all day long. When we arrived at a Motel in the evening, I started to feel a little uneasy and sick and had to stop. That was the only time I can remember feeling that I had too much coffee.

Generally, though, my ‘four cups’ restriction held up until recently. As I worked more and more from home, my coffee consumption increased to about five or six large mugs of instant coffee per day.

A Comfort Zone Challenge

What eventually sparked the idea to give up coffee for a while was something unexpected.

It was only after writing a story about stepping out of one’s comfort zone that I decided I could do that: I could make myself a little uncomfortable and stop drinking coffee. For the sake of a higher goal, one further down the path of my life, living healthy and avoiding consuming stuff that might not be good for me.

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Thus, while writing about the idea in my diary on Monday morning (26th of March), I drank up the mug of coffee that stood beside my notebook on the table, knowing that this would be my last one. At least for a while.

No more coffee. Cold turkey. Just as I did it when I stopped smoking years ago. Whenever I thought about drinking a coffee, I simply drank a glass of water or made myself a cup of tea instead.

How I Pulled It Off

I had surprisingly little difficulty giving up coffee. I didn’t feel more tired or less alert during my days. I didn’t feel much craving for coffee. Sure, the first few days I thought every once in a while “now I’d be drinking a coffee normally”, or “wouldn’t a cup of coffee be great now?” But there was no strong craving, contrary to what I had expected when I began. I may just have been lucky or it might have helped that I still drink tea with caffeine and a lot of water.

Maybe I expected it to be much more difficult based on my own experience with giving up smoking about nine years ago. During the first days and weeks of doing that, I certainly felt a strong craving for nicotine. Months and even years later it would still surface at times, though luckily it eventually vanished.

Whether that is just due to the difference in the substances — nicotine is much more addictive and thus also more inclined to lead to physical withdrawal symptoms — or also linked to how I approach behavior changes these days, I couldn’t say.

It certainly helped that I was a lot around my girlfriend these days, who rarely drinks anything else than water. I had her complete support all the time and no one luring me with the smell of a freshly brewed coffee or asking me to come for a coffee break with them.

I expect that it might get difficult when I’m in the office or around people who drink coffee, but by now I imagine I can instead just drink a cup of tea while they sip their coffee, and nonetheless take part in ‘coffee’ breaks and still have the social benefits that come with those.

What also didn’t happen were any improvements in health that were observable. Yet. I didn’t really expect anything like that, though, because a lot of these changes are subtle and will play out in the long run.

Two weeks later I can begin to assess the changes I did see.

Results

I expect removing coffee from my drinks will have a positive effect on my overall health in the long run, particularly for the cardiovascular system.

But what changes did I notice so far?

Caffeine consumption decreased (about 80%) ⇘

While I still consume caffeine in the form of green and black teas, my caffeine consumption went down drastically.

According to a report from the Mayo Clinic, black tea has about one third of the caffeine content of brewed coffee, green tea about one fourth or fifth. All the other teas I drank over the time don’t have any caffeine in them.

The numbers can only be used as a rough guide, given that roast and brewing temperature, time, and amount of coffee powder and whatnot all influence how strong a coffee ends up. Still, I roughly decreased my caffeine intake from about 5–6 large mugs of coffee (

600mg) to about one black tea and maybe three mugs of green tea per day (

While it was never the goal to quit caffeine altogether, it was clear that this would happen and that it will probably have a positive long time effect on my health.

Sugar and milk consumption dropped ⇘

I would usually drink coffee either in the form of a short espresso with a spoonful of sugar, or in huge mugs of coffee with a splash of milk.

I still have milk in my breakfast muesli and a little splash in my teas, but that’s it. I’d say this makes about 2dl less milk per day.

Besides coffee, I don’t usually sweeten any foods or drinks with sugar. Not even my tea. Consequently, my refined sugar intake — at least the one I can control and isn’t hidden in processed foods — dropped basically to zero.

Tea consumption increased ⇗

I decided that I still liked to have a hot beverage every now and then, especially since it’s still rather cold here at the moment, the winter hasn’t really worn off completely yet even though spring has officially begun.

Thus I began to drink more tea than I have in years. Apart from the habit of drinking a cup of green tea with my breakfast and the occasional binge-drinking of herbal teas when I have a cold or a cough, I haven’t drunken much tea over the years.

Self-image as an addict vanished

I don’t see myself as a caffeine addict anymore. That means that I don’t see myself as an addict to any substances anymore. I used to smoke, I used to binge drink alcohol, and for all these years I used to drink coffee and think of myself as someone who needs that stuff to be alert and focused at work or while studying.

By now I know that I don’t need any of these, that I can live happily without having a constant need for any specific substance. That’s a huge improvement in my own understanding of the control I have over myself, over my behavior and body. While I had learned this to a certain degree before— e.g. by establishing positive habits — it feels still empowering to realize that there are no substances anymore which have such a power over me.

Saving money

Coffee isn’t cheap. For the capsules to the coffee machine at the office I used to buy two packs of 30 capsules for about 17 CHF (that’s about 17 USD) every three weeks. I spent less when using the instant coffee variation, but way more when buying a cup at a coffee shop every now and then. Thus, while it might not be the worst money waste, I think I can easily save the equivalent to five annual Medium membership subscriptions by switching from coffee to tea and water.

My girlfriend called me a badass

She’s all in favor of me not drinking coffee anymore. Still, she was rather surprised that I simply did that out of the blue one morning and then stuck to it for days.

Until now she’s the only person who knows about it. I assume it will get tougher when I visit my parents in whose kitchen the scent of freshly brewed coffee constantly hangs in the air.

The Overall Effect Of The Experiment

I proved to myself that I can do it. I can give up something I liked for a long time even though I knew it wasn’t good for me. If nothing else, this fuels my confidence in being able to change deliberately, to accomplish something I had not thought I would be able to do. Something I had done for years and years without questioning.

I could change. Just like that. On an ordinary Monday morning.

And that’s what I want to end this story on. We don’t have to continue doing things just for the sake of it. On any ordinary day, we have the power to question the status quo in our lives and do something about it. We can reduce negative behaviors and increase those which are positive. Every day. There’s no need for an extraordinary event to change. No New Year’s Eve or huge life event.

We all have the power to constantly change. To change our behavior. To change our lives. For the better. Every day.

Do not wait; the time will never be “just right.” Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along. — Napoleon Hill

Why Starbucks Prices Went Up as Coffee Beans Got Cheaper

Starbucks isn’t the place to go for cheap coffee. It is selling an experience, not a commodity.

That approach has been immensely successful, drawing in millions of customers and propelling Starbucks stock to stellar returns. But the company’s strategy has created an odd situation this summer: It has raised retail prices for much of the coffee brewed in its stores just as coffee prices on world commodities markets have fallen.

Consider that once, long ago, coffeehouses were the trading centers of world financial markets. If you wanted to know the price of any commodity, you could find it while sipping coffee in London. But this year, if your only information about commodity prices came from coffee sold at Starbucks stores, you might have to conclude that a bull market was underway.

The opposite is true, however. Coffee has been caught in a commodities downdraft that intensified briefly last week as China, a big commodities consumer, devalued its currency. The currencies of commodity producers like Malaysia, Indonesia, Russia, Colombia and Brazil have fallen for months now, along with oil, iron and steel. Coffee has taken one of the deepest dives.

Yet on July 6, Starbucks said that its costs were rising and that it was raising the price of much of its brewed coffee by 5 to 20 cents a cup.

At the Midtown Manhattan store I frequent, a “venti” cup — 20 ounces of joe — rose 10 cents to $2.55 before tax, while a “tall” 12-ounce cup stayed at $1.95. Tall cups rose in price in many other places, said Jim Olson, a spokesman. Prices for food remain unchanged. Over all, Starbucks said customer bills would increase 1 percent.

In a statement, Lisa Passe, a spokeswoman, said Starbucks tried to “balance the need to run our business profitably while continuing to provide value to our loyal customers and to attract new customers.”

It may be succeeding, though as a customer who happens to follow financial markets closely, I was startled by an apparent disconnect between world events and Starbucks decision-making. Why should I be paying more at Starbucks when coffee has been getting cheaper?

The price changes in the global coffee market have been breathtaking. The futures price for standard Arabica, the benchmark for premium coffee, peaked in October and fell 44 percent in world markets by July 6, the day of the Starbucks announcement. Some companies responded by lowering prices. J. M. Smucker announced in late June that it was cutting supermarket prices of its Folgers and Dunkin’ Donuts brands by an average of 6 percent. Starbucks left its packaged coffee unchanged, but decided to extract more revenue in its stores.

The company’s ability to raise prices has delighted the stock market. Starbucks shares have returned 5.4 percent since July 6, compared with a 1.3 percent return for the Standard & Poor’s 500-stock index. The company has outperformed over longer periods, too. Its shares returned 51 percent, including dividends, over the last year, compared with 9 percent for the index; over five years, the return was 412 percent for Starbucks versus 115 percent for the index.

Starbucks has been growing rapidly and profitably, expanding while calibrating revenues and expenses. In a conference call with investors on July 23, Starbucks executives disclosed that they had already locked in the price for more than 80 percent of coffee supplies for 2020.

Hamish Smith, a commodities economist with Capital Economics in London, said in an interview that a company like Starbucks “can’t afford to be in a position where it will run out of coffee or will suddenly have to pay an unexpectedly high price for it.”

Starbucks’s financial statements indicate that the company tries to insulate itself from exposure to currency and commodity fluctuations through hedging and advance purchase agreements. Operating costs dropped in the fiscal year that ended last Sept. 28 because of lower commodity costs, mainly for coffee, the annual report said .

But when coffee prices drop unexpectedly, as they did this year, these advance strategies can have some negative short-term consequences: It’s likely that Starbucks paid more than the current spot market price for coffee stocks, which would be reflected in future financial statements.

That’s one reason Starbucks is on a different timetable than the broad market.

Another is that coffee accounts for less than 10 percent of Starbucks’s overall costs, Mr. Olson said. The premium Starbucks experience requires considerable spending on real estate and wages, and on extensive employee benefits, equipment, distribution and marketing, he said.

And there may be another factor. Howard Schultz, Starbucks’s chief executive, told investors during the conference call last month that “mobile payments now represent 20 percent of all in-store transactions in our U.S. stores, more than double the figure from only two years ago.” I use an iPhone app to pay these days: It’s easy to transfer money without noticing the cost.

Starbucks assumes that customers will consider the new prices to be reasonable, and maybe they are, if you considered past prices reasonable. In 1994, when Starbucks opened its Manhattan stores, it charged $1.25 for a small cup — then only eight ounces, known as a “short.” In inflation-adjusted dollars, that would be $2.01 today, yet a short cup in Manhattan costs only $1.85. You have to ask for one specifically, though; a short is no longer listed on store menus. Still, if you are careful, you can spend less in real money than you did in 1994, even after the latest price adjustments.

Meanwhile, Starbucks is churning out profits. Even if its prices aren’t in sync with commodities markets, the stock market appreciates its timing.

(community.competitors, customer,law,loss, prices, profit,taxes,wages)
1. Focus only on making a big ___
2.pay employees low ___
3.charge high ___
4.never break the ___
5.avoid paying ___ to the government
6.believe the ___ is always right
7.invest in the local ___
8. Put your ___ out of business
9. Be prepared to make a ___ for at least the first year.

Ответ

Проверено экспертом

1. Focus only on making a big profit

2.pay employees low wages

3.charge high prices

4.never break the law

5.avoid paying taxes to the government

6.believe the customer is always right

7.invest in the local community

8. Put your competitors out of business

9. Be prepared to make a loss for at least the first year

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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