Question

A futures contract on some commodities may be delivered using any of several different types of corn and there are several delivery locations. In such cases the price is adjusted by the exchange for the different types of corn.

Part a. Explain who decides which type of corn to deliver.

Part b. Explain which position benefit from the flexibility, the short or the long position?

Part c. Is a higher price more attractive to the short or long position?

Answer 1

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

· Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset and have a predetermined future date and price.

· A futures contract allows an investor to speculate on the direction of a security, commodity, or a financial instrument.

· Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes

a. The contracting parties are decided that which corn is deliverable. At the time of contract the parties are selected and choose available corn.

b. Which position benefit from the flexibility, the short or the long position

Long Position

If an investor has long positions, it means that the investor has bought and owns those shares of stocks. By contrast, if the investor has short positions, it means that the investor owes those stocks to someone, but does not actually own them yet. For instance, an investor who owns 100 shares of Tesla (TSLA) stock in his portfolio is said to be long 100 shares. This investor has paid in full the cost of owning the shares.

o With stocks, a long position means an investor has bought and owns shares of stock.

o On the flip side of the same equation, an investor with a short position owes stock to another person but has not actually bought them yet.

o With options, buying or holding a call or put option is a long position; the investor owns the right to buy or sell to the writing investor at a certain price.

o Conversely, selling or writing a call or put option is a short position; the writer must sell to or buy from the long position holder or buyer of the option.

Short Position

Continuing the example, an investor who has sold 100 shares of TSLA without yet owning those shares is said to be short 100 shares. The short investor owes 100 shares at settlement and must fulfill the obligation by purchasing the shares in the market to deliver.

Oftentimes, the short investor borrows the shares from a brokerage firm in a margin account to make the delivery. Then, with hopes the stock price will fall, the investor buys the shares at a lower price to pay back the dealer who loaned them. If the price doesn't fall and keeps going up, the short seller may be subject to a margin call from his broker.

Key Differences

When an investor uses options contracts in an account, long and short positions have slightly different meanings. Buying or holding a call or put option is a long position because the investor owns the right to buy or sell the security to the writing investor at a specified price.

Selling or writing a call or put option is just the opposite and is a short position because the writer is obligated to sell the shares to or buy the shares from the long position holder, or buyer of the option.

c. Is a higher price more attractive to the short or long position?

Having a “long” position in a security means that you own the security. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position.

A "short" position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value. If the price drops, you can buy the stock at the lower price and make a profit. If the price of the stock rises and you buy it back later at the higher price, you will incur a loss. Short selling is for the experienced investor.

Short position

                A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. A naked short is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. A covered short is when a trader borrows the shares from a stock loan department; in return, the trader pays a borrow-rate during the time the short position is in place.

1. A short position refers to a trading technique in which an investor sells a security with plans to buy it later.

2. Shorting is a strategy used when an investor anticipates the price of a security will fall in the short term.

3. In common practice, short sellers borrow shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place.

Long position

A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view. A long position is the opposite of a short position (short). Long position and long are often used In the context of buying an options contract. The trader can hold either a long call or a long put option, depending on the outlook for the underlying asset of the option contract.

1. A long—long position—refers to the purchase of an asset with the expectation it will increase in value—a bullish attitude.

2. A long position in options contracts indicates the holder owns the underlying asset.

3. A long position is the opposite of a short position.

4. In options, being long can refer either to outright ownership of an asset or being the holder of an option on the asset.

5. Being long on a stock or bond investment is a measurement of time