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referred to as a "leg". Id. If a trader merely bought a long
position or sold a short position, he would be said to have
acquired a "simple net position", and the trader would hope to
profit by a rise in the price of the commodity underlying the
long position or fall in the price of commodity underlying the
short position. Traders who invest utilizing spread positions
hope to profit by a favorable change in the price relationship or
differential between their long and short positions. The price
differential is a function primarily of the changes in short-term
interest rates and the value of the underlying commodity4 and,
secondarily, of storage and commission costs. Since storage
costs for precious metals are trivial, the major forces affecting
gold futures spreads are gold prices and short-term interest
rates. Id.
A simple commodity spread that has one short leg with a
nearby delivery date and one long leg with a more distant
delivery date is often referred to as a "backward spread" since
it is profitable when the dollar difference between the price of
the two contracts increases after the position is established.
Since prices generally increase in a rising or bull market, back-
4For example, if spot gold is $400 per ounce, and the
interest rate is 1 percent per month, a 6-month delivery will be
priced at $424 [$400 + (1 percent x 6 months x $400)]. Thus,
when the number of long contracts equals the number of short
contracts, the difference in price between the long and short
legs is entirely a function of the interest cost of carrying gold
from one futures delivery month to the other.
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Last modified: May 25, 2011