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re: Lumber prices are set for a shakeup with the rollout of new futures contracts
Posted on 7/25/22 at 1:17 pm to kew48
Posted on 7/25/22 at 1:17 pm to kew48
quote:
You don’t understand how the futures market works to manage price risk ! Once your hedged, you don’t care what happens to the lumber market price. It could go or down but your price is locked in.
I’m buying a contract “today” for a future delivery of lumber and that price that I pay is based on the markets estimate of what the future price.
Correct?
Posted on 7/25/22 at 2:34 pm to SlidellCajun
No. The price you pay is the cost of the futures contract for the month you purchased it. When you liquidate or sell that contract at the end of that month- so called clear your contract, you apply the gain or loss to the actual purchase of lumber in the physical market. Of course all this assumes that the closing price of the futures contract and the price of physical lumber converge as it does in a mature -well functioning futures market like natural gas, precious metals etc. These commodities have futures contracts that are deep and very liquid so that there is no trouble clearing your position toward the end of the contract. The only risk you may have is the basis differential that exist between wherever you purchase the real lumber and the location where the futures contract clears for possible delivery. If your in the business , you should study up on this. The rational for lowering the volume of the lumber futures contract is that more people will use it therefore increasing the volume ,liquidity and depth of the market.
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