Capital Business Finance

Compared to cash contracts, which require payment against the physical delivery of goods immediately or after a specified period, a futures contract is a special type of agreement made strictly under the rules of a commodity exchange, which may or may not call for the actual delivery of goods and payment in cash on a future date.

According to Emery, a futures contract can be defined as a contract for the future delivery of some commodity without reference to specific lots, made under the rules of some commercial body, in a set form, by which the conditions as to unit of amount, the quality and time of delivery are stereotyped, and only the determination of the total amounts and the price is left open to the contracting parties. Such contracts are meant exclusively for future settlement, though the exact date of the settlement is decided by reference to the wishes of the seller and the established rules of the commodity exchange. Such contracts do not specify the particular grade of a commodity, but impliedly refer to a basic grade called the contract grade, accepted as the common grade for all futures dealings.

The details in respect to the amount, the time of settlement, the quality and so forth are mentioned in the rules and regulations, and are common to all such contracts. The contracting parties have to decide upon the price at which the contract is to be settled, sometime in one of the trading months specified by the exchange. Futures contracts are made only in the ‘ring’ of the commodity exchanges, and not outside the exchanges. Only members of a commodity exchange can enter into such a deal. No outsider can become a party to a futures agreement. Such contracts can be made only in multiples of a fixed unit of trading. No such contracts can be made in fractions of these units.

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The capital that makes up your mortgage/ loan can come from a number of sources including other people’s deposits and savings, stored up in the bank and other investors, all of which make up the Capital Markets.  Of course, there isn’t enough cash in the general consumers accounts to make up the capital needed for the mortgage markets so the majority comes from investors looking to buy debt instruments, which in this case are bonds.

The buyers of these bonds are looking for a good return on their investments, which is of course completely opposite to people looking for a low rate mortgage.  In effect, you’re borrowing money from an investor at a given rate (for you an interest rate and for the investor a rate of return).  Of course, the investor is only willing to invest a certain amount of capital in such low yield bonds.

Now, the rates on a mortgage fluctuate from month to month and this rate is determined by how well ‘mortgage bonds’ are selling.  A rise in sales will see a drop in yield and a drop in sales will see  a rise in yield, thus attracting investors back into the market.  The result of the average mortgage holder will be the opposite though.  When investors leave the bond market, they will see a rise in mortgage interest rates.

Of course, the mortgage market is driven by a number of external factors, such as supply and demand but the greatest factors is that of inflation.  Where inflation is low, the return for the investor is high, but when inflation increases, it devalues the investment and at the same time the mortgage.  Suddenly a $120,000 mortgage can seem far less of a burden.

Inflation is kept under control by raising or lowering interest rates.  When inflation is rampant, interest rates are raised, resulting in a rise in mortgage repayments.

Recent sub-prime mortgage lending issues in the US have had a knock on effect throughout the world.  Billions of US dollars have been lost, simply because many of the associated bonds were bundled up and sold on to banks throughout the world.  These mortgages were in effect over-subscribed in the states, with many people only able to afford a house with one of them.  Unfortunately, the mortgages were being defaulted on and, having been sold on to UK, Hong Kong, German, French banks, they could not be easily recouped.  The collapse in this market left many banks in serious problems.  Losses could not be recouped and the bond market dried up as investors fled.  New mortgages became difficult to find and their rates were much higher than previous.  Interest rates have now been dropped so as to stimulate the market.  Lenders have maintained bond rates at a higher level, giving them greater yield and the result will be a higher return for what is now percieved a greater risk.

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