Question: How do futures investments work?

-- Harley Nerland, Denton, MN, USA 01/07/98 05:22AM

A standard textbook definition reads something like this:

When you buy a futures contract, you lock in a purchase price for the underlying commodity. Similarly, when you sell a futures contract, you lock in a selling price of the underlying commodity. How, then, do you make money trading futures? Well, futures prices move around all of the time, that is, they are volatile. Prices of agricultural commodities, for example, may rise in response to unfavorable weather conditions, increased demand by importers, or spread of plant diseases, and fall in response to abundant supplies or a shift in consumer preference. If prices go up after you buy a futures contract, then you earn profit since the futures contract has increased in value. For example, if you buy one gold futures at $340 per ounce and two weeks later, the price of gold futures is trading at $350 per ounce, then your futures contract is now worth $10 per ounce more than when you bought it. One futures contract represents 100 ounces of gold, so the total profit on your gold futures position is $1,000. That's the thrill. Be careful, though. Gold prices could have fallen instead, in which case you would have suffered a loss.

As a trader, your challenge is to anticipate price movements correctly and make the appropriate trade. If you expect prices to rise, you will buy futures or you can buy call options, and if you expect prices to decline, you will sell futures or you can buy put options. If your expectations turn out to be correct, then you will make money. If not, you will lose money. Realistically, it is virtually impossible to be right all of the time. In fact, many traders are wrong more often than right. BUT, they can still be successful traders. Managing risk is the key here and, because of its importance, needs to be reaffirmed time and time again.

Question: Why should I consider investing in professionally managed alternative investments?

-- Tina Yuthers, Cleveland, OH, USA 01/08/98 10:50AM

Basically, professionally managed alternative investments provide direct exposure to international financial and nonfinancial asset sectors while offering (through their ability to easily take both long and short investment positions) a means to gain exposure to risk and return patterns not easily accessible with investment in traditional stock and bond portfolios. Investors must come to appreciate that the investment benefits in professionally managed alternative investments is well founded in financial theory and empirical evidence. While, it is impossible in a brief response to convey all the benefits of these investments, it has long been known by financial professionals and academics that it is possible to use professionally managed alternative investments as a means to (1) reduce portfolio volatility risk, (2) enhance portfolio returns in economic environments in which traditional stock and bond investment media offer limited opportunities, and (3) participate in a wide variety of new financial products and markets not available in traditional investor products.

You should note that oftentimes, professionally managed alternative investments are only available directly to high net-worth individuals and financial institutions. However, through the use of commodity pools and funds, it's possible for investors with less assets to also participate in this useful and exciting investment field.