Futures Offsetting, Physical Delivery, and Hedging
Summary
The document explains why futures positions commonly end without physical delivery. It describes offsetting as closing a position by taking the opposite side in the same number of standardized contracts before expiration. The responses distinguish exposure to a commodity's price from an intention or ability to deliver or receive the physical good. They also describe hedgers, arbitrageurs, and speculators as different participant groups, with physical delivery more relevant to some hedging situations than to most trading activity.
The account presents futures as tools that can transfer or manage price exposure even when participants do not trade the underlying goods through the contract. It cites a passage claiming that fewer than one percent of contracts conclude with delivery, but supplies no independent evidence or market-specific breakdown. The explanations are informal and simplified; they do not discuss contract-specific settlement rules, delivery procedures, or cases where a position must be managed differently near expiration.
Key ideas
- A futures position can be closed before expiration by taking an equal and opposite position in the same contract.
- Hedgers may use futures to manage price exposure without intending to make or take delivery.
- Arbitrageurs and speculators commonly participate without seeking the physical commodity.
- Physical delivery is presented as an exception, though the document gives no market-specific evidence.
- Delivery and settlement details depend on contract rules not covered in the discussion.
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Full text
# Futures Contracts, Rollover, Offsets # Futures Contracts, Rollover, Offsets I was reading Trading Commodities and Financial Futures by Kleinman, I saw this excerpt: > When you buy or sell a futures contract, you don’t actually sign a contract drawn up by a lawyer. Instead, you enter into a contractual obligation that can be met in only one of two ways. The first method is by making or taking delivery of the actual commodity. This is by far the exception, not the rule. Fewer than 1% of all futures contracts are concluded with an actual delivery. The other way to meet this obligation, which is the method you will be using, is termed offset. Very simply, offset is making the opposite (or offsetting) sale or purchase of the same number of contracts bought or sold sometime prior to the expiration date of the contract. Because futures contracts are standardized, this is accomplished easily. My question is if 1% of contracts are fullfilled, how does this market work? Why would producers create contracts that they would not fullfill? ## Answer by KarolisR (score 3, accepted) https://quant.stackexchange.com/a/24672 Because they are hedging their commodity price exposure, not their ability to deliver/receive said commodity. ## Answer by Flib (score 3) https://quant.stackexchange.com/a/24679 Lets say we have 3 kind of players/trades: Hedge, arbitrage and speculative. In theory just hedges would be interest in delivery/receive in some case. But as the name say usually it's for hedge market only. When producers go to futures market it's not to sell/buy products it's only to protection this prices. You have other kind of instruments to sell/buy physical. And of course arbitrage and speculative traders is usually the great majority of players and sure they don't want delivery/receive nothing.
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