4 – L2 03 Commodity Futures V3

For most investors, it’s easier to buy Futures contracts that are tied to commodities. Buying a futures contract is an agreement between two parties to buy or sell an asset at a future date and at a fixed price. If you trade futures directly, remember to mark your calendar, because you’ll need to either close the position or roll it over by the time the contract is due. Let me explain what it means to close the position in a futures contract. Let’s say you enter into a futures contract with a farmer to buy one metric ton of cocoa, at a fixed price, at a fixed date six months from now. Since you’re buying you are long cocoa futures. The farmer who is selling is short cocoa futures. At that six month date, you’re required to pay cash and the farmer is required to send you one ton of cocoa. If you want to close your long position, then before the due date you should enter into a short position to sell one metric ton of cocoa at a fixed price and on the same due date. There’s a commodities exchange that handles the paperwork. But, it’s as if you paid for a ton of cocoa, then immediately sold that cocoa to someone else to get your money back. So, that was how to close a futures position. Rolling over contract is like renewing your gym membership for another six months. To roll over a futures contract, you start by canceling the contract when it’s near the due date. Next, you enter into a new contract to buy cocoa at an even later date, such as six months after the original contract due date.

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