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To: Gorjus

Of course I understand that futures is hedging and that buying a commodity at a future price can work against you.

But contracts for deliver on the futures market take many different structures and need not involve upfront payment. For example, growing up farming, we sold a portion of our future crop in the Spring for delivery the following Spring. We never collected a dime until we delivered. Failing to deliver, we were responsible to purchase commodity to deliver, at then current prices. This is how oil products are generally contracted. e.g. the airlines. If you had to pay 100% up front, it wouldn't be a futures market, it would be the current market with stockpiling/warehousing.

Why? The oil supplier is hedging against falling prices, the purchaser is hedging against rising prices. Both are willing to settle on something they can live with.

Wind generated power is being sold in this fashion now in order to back its capitalization costs. Users agree to pay a set amount (lock in) electrical rates for a given period. So far they are doing a booming business.


32 posted on 04/19/2006 8:13:27 AM PDT by SampleMan
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To: SampleMan

I recognize that there are various ways to structure the futures contract. My over-simplified example lumped the costs that will truly be sunk (both broker fees, etc. and lost opportunity cost for the committed money) with the final cost. Still, the sunk costs will be significant, on a significant buy. I think we'd need more than laboratory studies before that becomes economically attractive.


45 posted on 04/19/2006 9:03:17 AM PDT by Gorjus
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