{"id":6367,"date":"2024-11-28T06:32:25","date_gmt":"2024-11-28T06:32:25","guid":{"rendered":"https:\/\/www.alcircle.com\/blog\/?p=6367"},"modified":"2024-11-28T12:12:05","modified_gmt":"2024-11-28T12:12:05","slug":"hedging-futures-market-aluminium-futures-aluminium-price","status":"publish","type":"post","link":"https:\/\/www.alcircle.com\/blog\/hedging-futures-market-aluminium-futures-aluminium-price","title":{"rendered":"Hedging with Jorge #Episode12: A guide to cash settlement in the futures market"},"content":{"rendered":"\n<p>The futures market is a fascinating financial instrument that allows traders to lock in prices for commodities on a future date. Today, we\u2019ll dive into the concept of cash settlement and its role in futures trading, using an example involving aluminium.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"youtube-embed\" data-video_id=\"Qsk9IqzZcbc\"><iframe loading=\"lazy\" title=\"Hedging with Jorge #Episode12: A guide to cash settlement in the futures market\" width=\"696\" height=\"392\" src=\"https:\/\/www.youtube.com\/embed\/Qsk9IqzZcbc?feature=oembed&#038;enablejsapi=1\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<p><strong>A Quick Recap: Futures Trading Basics<\/strong><\/p>\n\n\n\n<p>Let\u2019s say today is November 28, and you\u2019re placing a transaction for March 15 to buy 25 tonnes of aluminium. This represents one lot, with a fixed price of $2,650 per tonne.<\/p>\n\n\n\n<p>At this point, you\u2019re long in the futures market, meaning you\u2019ve committed to buying the commodity at this price on the settlement date.<\/p>\n\n\n\n<p><strong>What Happens at Settlement?<\/strong><\/p>\n\n\n\n<p>In traditional physical settlement, if you do nothing by March 15:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>You send the money: Pay $2,650 per tonne for the 25 tonnes.<\/li>\n\n\n\n<li>You receive a warrant: This represents ownership of the purchased aluminium. <br><br>But what if you don\u2019t want to deal with the physical commodity? Enter cash settlement.<\/li>\n<\/ul>\n\n\n\n<p><strong>What is Cash Settlement?<\/strong><\/p>\n\n\n\n<p>Cash settlement allows you to offset your position before the settlement date. Instead of completing the transaction physically, you close your position by doing the opposite transaction:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If you started by buying, you sell to close your position.<\/li>\n\n\n\n<li>If you started by selling, you buy to close your position (more on this in the next blog).<\/li>\n<\/ul>\n\n\n\n<p><strong>How Does Cash Settlement Work?<\/strong><\/p>\n\n\n\n<p>Let\u2019s continue with our example:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>You\u2019re long for March at $2,650 per tonne.<\/li>\n\n\n\n<li>By February, the market price for March aluminium futures climbs to $3,000 per tonne.<\/li>\n\n\n\n<li>To close your position, you sell at this new prevailing price.<\/li>\n<\/ul>\n\n\n\n<p><strong>The Result?<\/strong><\/p>\n\n\n\n<p>The difference between the two prices ($3,000 &#8211; $2,650 = $350) becomes your profit. This profit is settled in cash on the prompt date of the transaction.<\/p>\n\n\n\n<p><strong>Why Use Cash Settlement?<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Flexibility: You can exit your position anytime before the settlement date.<\/li>\n\n\n\n<li>Speculation Benefits: Lock in profits without needing the physical commodity.<\/li>\n\n\n\n<li>No Physical Hassle: Avoid the logistical complexities of storage and transportation.<\/li>\n<\/ul>\n\n\n\n<p><strong>A Preview of Going Short<\/strong><\/p>\n\n\n\n<p>While this example focused on a long position, the same principles apply to short selling in the futures market. In our next blog, we\u2019ll explore how cash settlement works when you bet on falling prices.<\/p>\n\n\n\n<p>Stay tuned for more insights on navigating the dynamic world of aluminium futures trading!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The futures market is a fascinating financial instrument that allows traders to lock in prices for commodities on a future date. Today, we\u2019ll dive into the concept of cash settlement and its role in futures trading, using an example involving aluminium. A Quick Recap: Futures Trading Basics Let\u2019s say today is November 28, and you\u2019re [&hellip;]<\/p>\n","protected":false},"author":89,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-6367","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-uncategorized"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Hedging with Jorge #Episode12: A guide to cash settlement in the futures market Hedging with Jorge #Episode12: A guide to cash settlement in the futures market<\/title>\n<meta name=\"description\" content=\"the concept of cash settlement and its role in futures trading, using an example involving aluminium.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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