Forward and futures contracts
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Futures curves II
Voiceover: I want to use this video to try to get a better intuition for futures curves and in particular to understand that the futures curves shows a snapshot in time of the different market prices for the, essentially the delivery price at different future dates and when I say that, I know it was a kind of confusing statement. In this futures curve right over here, when you have a delivery date that's 0 months from now, that's essentially today, that's the market price. That is the actual market price of that commodity. In this example, the commodity is silver. So if you were to go out and buy silver today, it would cost you roughly $32, let me say that this is per ounce. It would cost you $32 per ounce. When I say one out here, this is one month in the future. I'm not talking about the price. I'm not talking about the spot price of silver in a month. I'm talking about the price today in the market, if you were to agree to buy or sell silver in a month. The futures price for a delivery one month out, that's what that is right now. So I want to make it very clear. This is not showing you how the spot price of silver will move over the next eight months. It's telling you today. If you wanted to transact in silver right now, you would transact at $32 an ounce. If today you agree to transact in silver a month from now, you would transact, you would buy or sell, it looks at around $33 an ounce. If today you were to agree to buy or sell silver four months from now, you would do it at $35 an ounce. If today, I don't want to be redundant, but if today you were to agree buy or sell silver eight months from now and you were to lock in the price, you would lock in a price, it looks it about I don't know, $36 an ounce. So this is really a snapshot in time and if for example, let's say tomorrow, the price of silver, there's this huge silver shortage or people realize a new application for silver that can change the world then what you would have tomorrow is that this whole curve would probably shift up. The whole curve would shift up something like that, so no matter when you decide to actually transact in the silver, it'll actually get more expensive but I want to make it very clear that this is just a snapshot in time and to better understand that, I've also drawn over here how the prices can move it over time and I've drawn different durations. So in purple right over here, I've drawn the spot price. So this is the spot price today and over here, this is the spot price today but then I've shown how it changes in time. So this is kind of closer to a traditional stock chart. This just tells us that look, the stock price started at $32 and went up a little bit, went down a little bit. It kind of just goes up and down, oscillates a bit over the next eight months. So this is actual movement over time. This is a snapshot of delivery dates at some point in the future. So the spot price just moves around and let's just take this green contract right over here. So when we start on the first day, the green contract, if you agree to transact in silver four months from now, you're agreeing to transact at about $34. So that's where you would transact right now, that four month out contract, but as you move few - as you move more and more forward in time, you're getting closer and closer to that delivery date. If you move one month into the future, now that contract is only going to be three months out. You move two months in the future, now that contract is only two months out. All the way until, if you move four months out, this contract will now be essentially the spot price because you're now agreeing to transact now. That'll happen four months from now, but you'll now be agreeing to transact at that moment and so at that moment, that price should be the same as the spot price, so you'll have this convergent with the spot price and the same thing for the eight month out contract, it should converge over the next eight months.