What it means
A futures contract is an agreement to buy or sell a set quantity of an asset at an agreed price on a future date. COMEX standardises these contracts, so each one covers a fixed amount of metal and has set delivery months.
Because everything is standardised, buyers and sellers can trade quickly without negotiating terms each time. Businesses use COMEX mainly to hedge, meaning to reduce the risk of price swings.
A copper pipe manufacturer worried that copper prices will rise can buy futures to lock in a cost, while a gold miner can sell futures to secure a selling price. If the market moves against them in the physical market, the gain or loss on the futures contract offsets it.
Speculators also trade there, taking a view on prices without intending to handle any metal. Their activity adds liquidity, which makes it easier for hedgers to find a counterparty.
Most contracts are closed out before delivery, so very little metal changes hands compared with the volume of trading. Trading is done on margin, which means a participant puts up only a small percentage of the contract's value as a deposit.
This gives leverage, so a small price move can create a large gain or loss relative to the money deposited. The exchange adjusts margin requirements as market conditions change, and daily settlement means gains and losses are paid in cash each day.
The nuance for finance teams is that the COMEX price is a paper price for a standardised contract, not necessarily the price you will pay for physical metal. Premiums for shape, purity, location and delivery can add to the cost, so always compare the futures price with an actual supplier quote.
Price quotes also move with the broader economy. Metal prices often react to interest rates, the strength of the dollar and expectations about industrial demand, so treasury teams usually track these alongside the futures curve.
A basic understanding of those drivers helps managers judge whether a hedge is cheap or expensive.
In practice
Real-world examples.
Example
A jewellery manufacturer must buy gold in six months to fulfil a large order. It buys COMEX gold futures today to lock in the price, so a rise in the market will not squeeze its margin. The cost of the hedge is small compared with the price swing it removes.
Example
A copper wire producer sells futures to hedge the value of its inventory. When copper prices fall, the loss on its stock is partly offset by the profit on the futures position. Its treasury team monitors the position daily and sets aside cash to cover any margin calls.
Example
An investment fund believes silver prices will rise and buys futures contracts rather than physical silver. It avoids storage and insurance costs but must manage daily margin calls if the price moves against it. It also accepts that a sudden price move could trigger a call for extra cash within a day.
Formula
Calculation
Contract value = futures price x contract size
Margin deposit = contract value x margin percentage
Profit or loss = (exit price - entry price) x contract size
A standard gold futures contract covers 100 troy ounces. Suppose gold futures trade at $2,000 per ounce. Contract value = 2,000 x 100 = $200,000. Assuming a margin requirement of 5%, the deposit is 200,000 x 0.05 = $10,000. If the price rises by $20 per ounce to $2,020, the profit is 20 x 100 = $2,000, which is a 20% return on the $10,000 margin.Case study
Seen in the real world.
Redstone Metals is an illustrative, fictional copper fabricator that signed a fixed-price contract to supply $3,000,000 of copper tubing over a year. The finance director realised that a rise in copper prices before it bought the raw metal could wipe out the profit.
She bought COMEX copper futures covering the expected purchases at today's price. Three months later, copper prices rose by 10%, which increased the cost of the metal by $240,000 but produced a gain of the same size on the futures.
The illustrative lesson is that the hedge did not make extra money, but it protected the contract margin. The company also kept cash available to meet any daily margin calls. The treasury team reviewed the hedge every month to make sure it still matched the expected purchases.
Watch out
Common mistakes.
- Treating the futures price as the final price of physical metal, when premiums and delivery costs can add to it.
- Underestimating the effect of leverage, when a small price move can produce a large loss relative to the margin posted.
- Forgetting that gains and losses are settled in cash every day, so the business needs liquidity for margin calls.
Questions
People also ask.
What does COMEX trade?
Futures and options contracts on metals including gold, silver and copper.
Do COMEX traders take delivery of metal?
Rarely, because most participants close their positions before the delivery date.
Who owns COMEX?
It is part of the CME Group, which operates a number of derivatives exchanges.
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