Futures exchanges require full settlement once the contracts expire and the counterparties are matched. BUT in the meantime, you have to have margin in place to secure your positions.
For example, if you put a trade on in WTI for 1 lot at $60 (so $60,000 worth of oil as 1 lot = 1000 bbls), you have to pony up around $5000 IIRC whether you are the buyer or the seller. This amount varies depending on your credit rating, history, overall net position etc.
If the trade moves against you, you have to put up more and more such that you have enough cash on deposit with the exchange that they can cover your loss if/when you liquidate. IE if you sold at $60 and the market moves to $63, the exchange wants to have $3000+ in hand. The + being enough to cover a days estimated move while they are shaking you down for more cash.
The same thing happens in OTC markets. The credit guys spend a lot of effort tracking who owes who how much. You should see the scramble to net out positions when an Enron or Refco goes belly up. People put up margin or letters of credit or otherwise your positions get forced to close and the losses booked. A BP or Exxon will usually have open credit with everyone as they are solid to perform. Harken Energy under GW -- Full L/C per terms of counterparty drawn on a AAA bank! A good credit manager is worth his/her weight in platinum. Nothing worse than having a great trade with a counterparty that can't/won't perform. Lawsuits take forever and usually recover jack.
this may not be 100% correct. While I traded these things for years, I always worked for companies with stellar credit and we had lots of nice accounting types that handled the details.
But the rest of your argument is correct. Trades settle in then current dollars. However, the headline futures quote is usually for the prompt contract which only has 0-30 days left to run. Not much interest rate effect over such a short period. Interest rates are very much a part of a trader's analysis of his/her forward book. Especially if there is a lot of derivative risk esp. options.
(assuming 2.5% inflation: 53.50/1.0256)
The question I am answering is, how much money do you need to have today to have $60 in 6 years' time? You need much less than $46, because you can get at least 4.85% if you buy US treasury bonds. That is 33% over 6 years. So if you buy $40.27 in 6-year bonds today you'll have $53.50 in 6 years' time.
Now, you are right that, adjusted for inflation, that is $46 today. So, investing $40 today you can make the equivalent of $46 of today's money in 6 years. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Indeed. The question I was trying to answer was: What is the real price, in 2005 dollars, predicted by the futures market? And the answer to that question must be to adjust for inflation but not for interest.
The result then is that the market really expects oil to drop (gradually) 25% in six years, not the 10% that the raw numbers imply.
It looks paradoxical to me and I don't quite know how to resolve it. Both numbers are right for what they calculate, but notice that someone said upthread that the stock market is pricing oil stocks as if the long-term price of oil were $40. Maybe there's something there. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
