Definition§
Look-alike contracts are cash-settled financial products designed to mimic the settlement price of similar exchange-traded, physically settled futures contracts, irrespective of the underlying contract’s specific terms. These contracts are overseen by the Commodity Futures Trading Commission (CFTC) and allow traders to engage in derivatives trading without the complexities associated with physical delivery of the underlying asset.
Look-Alike Contracts vs Futures Contracts§
| Feature | Look-Alike Contracts | Futures Contracts |
|---|---|---|
| Settlement | Cash-settled | Physically settled |
| Delivery Requirement | No delivery obligation | May require delivery of the underlying asset |
| Trading Venue | Over-the-Counter (OTC) | Exchange-traded |
| Speculation Potential | Higher, as critics argue it fuels speculation | More tightly related to physical commodities |
| Regulation | Regulated by CFTC | Regulated by CFTC |
Examples & Related Terms§
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Over-the-Counter (OTC) Derivatives: Financial contracts that are traded directly between parties rather than through an exchange.
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Commodity Futures: Contracts to buy or sell a specific quantity of a commodity at a specified price on a predetermined future date.
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Cash Settlement: A method of settling a contract where the difference between the contract price and the market price is paid, as opposed to physical delivery of the asset.
Diagram of Look-Alike Contracts§
Humorous Insights§
“I’d stay away from look-alike contracts. They’re like a diet soda – looks the same, but one of them is clearly full of chemicals!”
Fun Fact:§
Did you know that the first standardized futures contract was created by the Chicago Board of Trade in 1848? They were probably wondering how to make lots of corn without getting their hands dirty!
Frequently Asked Questions§
Q1: What is the main advantage of look-alike contracts?
A1: They eliminate concerns about physical delivery, simplifying the trading process.
Q2: Why do critics dislike look-alike contracts?
A2: Critics argue they can fuel speculation and lead to market inefficiencies, as they are not directly tied to the physical asset.
Q3: Are look-alike contracts regulated?
A3: Yes, they are regulated by the Commodity Futures Trading Commission (CFTC).
References & Further Reading§
- CFTC Official Website
- “Options, Futures, and Other Derivatives” by John C. Hull
- “The Handbook of Financial Derivatives” by David H. Litvack
Test Your Knowledge: Look-Alike Contracts Quiz§
Thanks for diving into the world of look-alike contracts! Always remember, just because it looks like a good investment doesn’t mean it is!
