Question

Review the information on gold futures contracts of the CME Group-based on contract
specifications available in case Exhibit 4. How do gold futures work?

Answer 1

Gold futures contracts of CME group:

The suite of gold products would include full (100 oz), Mny(50 OZ) and E micro (10 oz) contracts that provides flexibility to the market users and choice in tailoring their risk management programs. With COMEX now part of CME group the world’s most diverse derivatives market place, the metal markets are growing stronger.

Future market contracts of the CME group

• The group’s global futures contract seems to be a global benchmark.
• The participants to the contract would include refineries, banks, and mining companies. Individual traders etc.
• The contracts are listed 60 months forward which enables the establishment of a forward price curve.
• Electronic mode of futures trading is available in CME group. This is considered to be the world’s largest electronic trading platform offering risk management opportunities for the participants throughout the world.
• Price can be managed separately from the supply.
• Over the counter transactions are submitted for clearing through CME. This helps the participants to conduct off exchange business,, take advantage of central counter party clearing and also negotiate their prices.
• CME serves as buyer to every seller and as seller to every buyer. This eliminates the credit risk for each participant.
• The participants are provided with the facility of price transparency, management of risks, dealing with counter party risks etc.

Working of gold futures:

The future contracts are those which enable the future delivery of specific commodity or instrument. This would include delivery of 100 troy ounces of gold. They have a range of contract dates which is monthly for next two months and up to six years in the future. A future buyer would lock the right to buy the gold at current market price and similarly the seller would do the same by locking the same price for delivering the gold on the contract date. Traders with no involvement can buy and sell the futures contract in order to earn profits from the changing prices. In order to avoid delivery, the trade can be rolled or closed to a gold futures contract.

• Margin deposit to trade: the feature that makes futures attractive is the leverage which is obtained due to low deposit required to trade. This helps in controlling large value of gold with small money deposit.
• Calculation of profit and loss: the profit or loss from the futures is multiple of change in the price of gold. In futures concept, trading at minimum price is called as a tick.
• Considerations for trading: futures help trading in either direction. For example if the price rises, then trading can be entered with a buy order and vice versa. The commodity brokers will generally balance our accounts at the day end.
• E micro gold: this has been developed for the individual traders to come to the action. This type of futures contract is for 10 ounces of gold. In this contract, the value of the contract, tick values, margin deposits are 1/10^th the size of gold futures contract or at the time of publication.