Commodity Futures 101: Learn How to Trade Commodity Futures
Ken Trester, April 17, 2009
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Here's Why
Let's say the difference widened to 5 cents. What would happen?
A knowledgeable hog farmer would buy some hogs today and immediately sell a June futures contract for 5 cents more than his purchase price. Since it will only cost him 4 cents to bivouac and feed his hogs for two months (the carrying charges), he has guaranteed himself a 1-cent profit.
In an efficient market, large commercial hog farmers do the same thing, driving the price difference down if it widens to more than the carrying charges.
Learn more about trading: How Interest Affects Options Prices
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