Hi I have a question here hope someone can help. In chapter 5 about future contracts, it is said they are normally closed before reaching the exercise date. Why? I have some idea but not sure. I guess future contracts are settled down every day, so all the gains and losses will be sort out at the end of the day. The purpose of future contract is to hedge price movement, it has no intention to deliver any product. Hence people close it out before exercise date, they are not going to lose much anyway. However I suppose people will hold the future contract till exercise date if they want to trade the underlying asset.
Most futures trades are closed out before delivery, realising the profit or loss. This is because the investor does not normally wish to actually own the asset, but simply wants to hedge or speculate on the market price of the underlying asset. Doing this via standardised futures is quicker, cheaper and easier than buying and/or selling the underlying asset itself. Companies actually wishing to receive the underlying assets normally arrange forward contracts where they can specify the exact delivery details, product quality, etc.
