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To grasp the fundamentals of silver future trading, consider the case of a silver medal maker who has been awarded the contract to supply silver medals for forthcoming sporting event. In order to meet the deadline, the factory would need 1,000 ounce of silver in 6 months. He looks up silver pricing and discovers that it is currently trading at $10 each ounce. The manufacturer may be unable to buying the silver now because to a lack of funds, issues with secure storage, or other factors. Naturally, he is concerned about the prospect of a price increase in silver within next six months. He wants to lock in the purchase price at roughly $10 to protect against future price increases. To overcome some of his concerns, the manufacturer can open up into the silver futures contract. The contract might be set to expire in 6 months, giving the manufacturer the option to acquire silver at $10.1 each ounce at that time. He can lock in the future price by purchasing (having a long position on) an futures contract.
A silver mine owner, on the other side, expects her mine to yield 1,000 ounce of silver in six months. She is concerned that the cost of silver may fall below $10 per ounce. The silver mine owners can profit by shorting (selling) the above-specified silver futures contract, which is now trading at $10.1. It ensures that she will be able to sold her silver just at agreed-upon price.
Assume that each of these players agree to a set price of $10.1 per ounce in a silver futures contract. Depending on the spot price current market price and CMP of silver six months after the contract expires, the following can happen. We’ll go over various different scenarios.
Silver Futures Trading In The Real World
Although the prior example is a solid demonstration of silver futures trading & hedging, trading in the real world is a little different. Silver futures contracts with standard specifications are available for trade on different exchanges across the world. Let’s look at how the Comex Exchange part of Chicago Mercantile Exchange CME group handles silver trade. 2
The Comex Trading three different types of silver futures contracts, each with a different number of troy ounce of silver 1 troy ounce is 31.1 grams.
A total contract price of $15.7 x 5,000 = $78,500 will result from the price quote of $15.7 for a whole silver contract worth 5,000 troy ounces).
A fixed rate margin of $12,375 is required for a whole silver futures transaction. To take one position in the whole silver futures contract, one just requires a margin of $12,375 (instead of the real price of $78,500 in the prior example).
Because the entire futures contract margin value of $12,375 may still be too costly for some traders, E-mini & micro contract are accessible at lesser margins in similar proportions. The E-mini contract half the size of a full contract requires a $6,187.50 margin, while the micro contract (1-5th the size of full contract) needs a $2,475.3 5 4 margin.
Physical purified silver (bars) is backed by each contract, that is assayed for 0.9999 purity and stamped and serialized by an exchange-listed & licensed refiner.