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As one of the other commentators mentioned (and has been called out a few times), in the case of other futures, you are actually settling them with the commodit
by mdip 9y ago
As one of the other commentators mentioned (and has been called out a few times), in the case of other futures, you are actually settling them with the commodity in question, but in the case of this product, you are settling with cash. I think I understand what you're saying, and I don't think I have any fundamental problem with it -- mainly because I don't invest in the futures market so it's simply "unimportant to me" how it works in this case -- but I'm curious: is this a normal practice?
Is it more common for a futures-based product to be settled with the product it's based on or is it more normal for it to be settled in this manner?
My curiosity, if the way they're executing on this is unusual, is "why"? I mean, take oil futures as a good example. It'd seem a whole lot easier to settle a BTC future with actual BTC than to settle an oil future with actual oil, so why isn't it the other way around? Heck, why wouldn't all of these futures-based financial products be handled in a cash-based manner -- what's the downside? (I'm not arguing for or against either method -- I really don't know).
My apologies if these are truly stupid questions -- I imagine I sound to someone who works/studies this sector like people sound to me who think "Facebook" and "The Internet" are interchangeable terms, but if you're willing to play along, here, I certainly appreciate it. :)
- kgwgk 9y agoKeep in mind that most commodities futures contracts are never settled. They are closed before expiration (rolling into a new contract if you want to keep the position open). Many brokers will close your position before expiration, because they are not prepared to handle delivery, even if younwant to. There are also some commodities futures that are cash-settled. Futures on financial indices, interest rates and such are usually cash-settled. But some futures based on financial instruments are “physically” settled, like US Treasury futures.