I thought I had understood futures contract. But it seems the daily settlements betray my understanding.
Futures contract provides price & product safety to involved two parties. E.g. Wheat Farmer and Baker
It seems Futures contract poisitions (long, short) are credit/debit accordingly based on current market price using daily settlement.
If the price is locked then why is this daily settlement doing? The profits and losses of a futures contract depend on the daily movements of the market for that contract and are calculated on a daily basis..
- Are we talking about Famer and Baker here or about the traders who bid and trade on futures available in the exchanges?
- Or else, futures contract is not observed as an independent element but that has an effect pre/post transaction. e.g. Famer agreed to sell Wheat for 4 dollar per bussel in 1 years time. In one years time market price is 5 dollar. If he had sold wheat in the market he would have earned extra 1 dollar. But it doesn't mean he is at a loss. Is he? On the other hand Baker may choose to keep the wheat for bread production or sell it to get 1$ profit.
I just want to understand who is affected by daily settlement - the farmer/baker or traders.
In terms of interest-rate/credit/bond futures, I guess this could even be more confusing - unless I figure it out now with commodity aspect.