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Current time:0:00Total duration:3:51

Video transcript

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 so what when I say that I know those kind of confusing statement and this futures curve right over here when you have a delivery date that's zero 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 thirty two dollars let me say that this is per ounce it would cost you thirty two dollars 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 thirty three dollars 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 to buy or sell silver eight months from now and you were to lock in the price you would lock in a price it looks at like about I don't know thirty six dollars 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 could change the world then when 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 a spot price today and over here this is a 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 that's not the spot 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 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 thirty four dollars so that's where you would transact right now that that four month out contract but as you move beautiful 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 a spot price so you'll have this converging with the spot price and the same thing for the eight month out contract it couldn't it should converge over the next eight months