Comment by watwut
12 hours ago
There is no loan necessary in the plane example. Future is an agreement that you will buy/sell a thing for set price in a set date. No one needs to borrow anything for it to work. To manage the repository, the plane company will have contract to by x barrels at 1 of March for some price. That is it, that is what future is - contractual obligation to with a set date.
Also, while origin stories are nice, most future trades are pure speculations on price. There is no reason to pretend these original stories are how securities are actually used.
Your story may make a bit more sense with options where one party can choose to exercises their right to sell or buy. Then you can use it to manage actual amounts of commodity. But futures do not carry any such option with it. It is strict agreement with no choices. The plane company can use futures to guarantee certain fuel price in the future, so that some short term market swing wont make fuel too expensive for them.
> There is no loan necessary ...
That is also not what Williams says. He says a simultaneous long cash--short future position is practically the same as a loan of the corresponding commodity. (With the lending side being short cash--long future.) This activity accounts for many of the patterns we see in futures markets.
That position has zero to do with managing fuel inventory. He was trying to argue this is supposed to help managing inventory in practical world.
These patterns are about speculation, not about managing inventories.
A futures trade always involves variation margin, and if you read a margin agreement you’ll see it is a credit agreement. That’s so people don’t just run away from trades which are underwater and screw the other side over.
That is something you have to do when you do speculative trades. That has zero to do with managing inventory.
You are not required to take loan to buy futures. You can do so, because then you can bet more then you have. But you dont have to.