 Hello everyone, Masal Khayr with Ali Hamadi representing Tick Mill and the webinar series for futures and how they're used in the capital markets. I hope everybody is doing well and had a good week over the last week since we last discussed the last webinar last Tuesday and we have more interesting information to cover this evening. But before we start, we have the line, if you want, with us, Adnan Shwakie from Tick Mill. There were some last week, for me, where we found the webinars that we did last week on their YouTube channel. Adnan, if you can please provide the link where everybody can access the webinars that have been done in the past. That way everybody can have access to them at any time they need. Adnan, if you can find all the previous webinar recordings in one playlist on YouTube, the link is available. So if you don't have it, please feel free to access the link at any time. And just so you know, tonight is going to be, is our eighth webinar within the futures series. So you should be able to find the seven previous webinars. And this evening's webinar will be updated and to the platform within one to two business days. Come in. So Adnan Shukran, have a good evening. I'll catch up with you later and I'll get started now with the webinar itself. So, hello. What we're going to be discussing this evening are the futures curves. Now I promised everyone last time that I will be trying my best to incorporate Arabic, the conversation, the Hadith. So bear with me if it's inaccurate in some shape or form. But like I said, I will do the best I can. But tonight we're going to be discussing the futures curves and how to analyze and distinguish between the different curves and how to best use that in your decision making and to any type of positions that you may or may not be investing in and taking in. Without further ado, how to view and analyze futures curves on specific commodities or assets. I like to keep the Hadith very informal and conversational so that I'm actually having a conversation with you and try to explain a little more than just reading it off of the slides that are prepared. But you can read them obviously and I'll be discussing them in further detail. But the main thing that we're going to be discussing tonight are the two main types of futures curves that will help you distinguish where the specific asset or commodity is within the market in relation to its spot price and in relation to its future price, depending on what type of maturity that you end up choosing. So with that being said, the shape of the futures curve is important to commodity hedgers and speculators. So this works both ways. It's not necessarily bust the hedgers or the speculators. And the two main types of curves that they pay attention to are one, the contango curve and two, the backwardation curve. And in this Hadith, I will also share with you some examples later in the presentation. But both care about whether the commodity futures markets are contango markets or normal backwardation markets. Normal backwardation is the same as the backwardation curve. And the contango and backwardation refer to the pattern of prices over time, specifically if the price of the contract is rising or falling. So what are the curves? Contango refers to when the futures price is above the expected futures spot price. A contango market is often confused with a normal futures curve. Very simply, is that the spot price, Masalaam Hamsin, or the future price, Hamso Hamsin, this produces a contango curve. The spot price is lower than the expected futures price. What is backwardation? A normal backwardation or backwardation is when the futures price is below the expected spot price. And a normal backwardation market is often confused with an inverted futures curve. Using the example of the spot price Hamsin, or the futures price Hamso Hamsin, the backwardation is below. The spot price is Hamso Hamsin, and the futures strike price for expiry date price is Hamsin. So this is the difference between contango and backwardation curves. And what do those look like? Now here I will give you an example of rolling futures in contango and backwardation. When I'm going a portfolio of futures contracts and you're rolling in one and in and out of another and into another out of one and into another contract over the course of time based on the positions that you have within your portfolio. But if we were to take just one specific isolated futures contract and look at, okay, what scenario are we in? Are we in a contango curve situation? Oh, are we in a backwardation curve situation? So if you look at the green line here on the corn shoe is spot price of the actual commodity or asset that we are investing or trading in. And as time gets closer towards the expiry date, the price of the futures price is higher than the spot price. And as you can see here, the backwardation would come with the spot price. And as you can see here, the futures expiry date price. So the actual spot price and its curve is a down swinging curve. And this is why they think it's often confused with an inverted curve. And the other contango curve is often looked at as a normal type of futures curve. Okay. Now, to, okay. So to better understand the difference of the two to start with a static picture of a futures curve static. It's not dynamic. A static picture of the futures curve places futures prices against contract maturities. So with, if you look here, the head of this graph, it's very simple where the blue would let's say symbolize a normal futures curve, whereas the orange line would depict an inverted futures curve. Okay. And these are the price differences at different contract maturities. So as you can see any a normal curve of if the spot price here in the home, that come up to $60 a year, and then back to $80 a year, but then back to $65 a year, or back to $90 a year, etc., etc. What's that is she on the inverted curve? And this is analogous or basically similar to a plot of the term structure based on the interest rates. We're looking at prices for many different maturities as they extend into the horizon. So home is a, we look at very simply they're increasing and hiking interest rates as we speak. The interest rates have increased three quarters of a point, 75 basis points. We'll see Haki Kamena and the next meeting that they're going to minimum hike another 50 basis points, which would take the interest rate window, the Fed window is about the between 75 basis points and 1% all the way up to one and a quarter percent to one and a half percent. All of this has an effect and let's say cascading effect and drawdown effect on futures pricings based on specific assets, namely commodities and more importantly so interest rates, futures assets and contracts. So now that we know what we're trying to identify within the futures market on a specific asset that you may be wanting to invest in or you already are invested in and looking for ways to either speculate further and or hedge your portfolio. Now we're going to learn how to identify where the spot prices of the asset that you're invested in and what type of curve or scenario that it lies in and what are the normal outcomes and it should be here under the normal circumstances. As we have to understand there is nothing that we would be able to forecast with 100% accuracy. It is important for both hedgers and speculators to know whether the commodity futures market are in contango or backwardation scenarios. So all of this means that the asset or commodity will always end up having a spot price and a forward futures price embedded in a futures contract depending on the maturity. So the maturity of each of these contracts will vary in the futures price of that contract. So literally from the beginning you'll be able to see okay it's spot and then the futures price based on the maturity that you're looking at is about 600 or 100 or 200 or whatever it is. They will be higher than the spot price or they will be bigger than the spot price. But then they will be able to know how to manage and how to analyze what the value of these curves is. Investors in general who are long, they are buyers, they end up not selling short, they're holders or buyers want a normal backwardation spot price meaning that the future spot price is below the current spot price and want the future spot price to increase over time as it gets closer to maturity. Okay and I'm going to give you some examples here but first of all I want to give a little bit of information on a historical chart on oil, crude oil, it's not up to date meaning it doesn't exist in the picture but it gives us up through 2015 the actual spot price when can it and it gives us the forecast up to 2021 and I want you guys to take a look and see how accurate or inaccurate or or how let's say relevant futures contracts are regarding specific assets and in this case it would be oil. Okay so Anna before we get started reading Schumannetta, Kilshihon Al Yameen, but they come here and get this into context. So now what we're looking at is Brent crude price and if you look at the dates at the bottom okay and each column represents Sydney. So I'm talking January 2008 January 2009 January 2010 etc etc all the way to January 2021 okay I'm going to take this out of the way so we can have a better idea. All right what we're looking at now everything in black is the actual spot price of the movement of Brent crude so you can see here it was at $60 a barrel and it creeped up to 140 plus or minus came back down to 40 plus or minus etc etc and then then it stops here at the time of this example that I'm providing you in 2015 the spot price in 2015. Okay now what are we looking at? We're looking at now everything from 2015 to 2021. I don't want you to get too confused with all these colors. I'm going to make it very simple and simplified. This blue line here represents the SEC. The SEC the Securities and Exchange Commission out of the United States the forecast based on their year end of 2014. Look at if it's basically a flat line forecast of plus or minus a hundred dollars a barrel over the course of what the following five years 17, 17, 18, 19, 20, even 16, 20. Okay if you look at the red line these are the futures forward curve the futures curve men January 2015 moving through 2021. Now where is what I want to get at today? Okay so what we're missing out of this is from February 2021 all the way up to year to date as we speak today but as of today Hala looking at my screen here crude oil is trading at 113 dollars a barrel plus or minus. Okay their forecast was plus or minus a hundred the futures contracts when the spot price was down here but look at the curve what that curve is this this is a shoe a can a shoe can taken curve. Okay now this type of curve indicates the spot price is lower than its future value at expiry. Okay so I'm going to get into in the discussion further what types of scenarios in theory and what to be looking for. Okay so that we can see the information that I have for you listed to the right of the graph. There we go. Okay so knowing the difference between the contango and the backwardation will help you avoid losses in futures markets. Now how do we value them what type of markets do we want to be involved in understanding to take when to take profits and when to cut losses how hedgers use them how speculators use them etc etc. So during contango as the future price is higher the profit is maximum when you sell it in the future that makes sense so if you if you buy something down here at the particular price that is being offered at and you sell it later well you can ride the curve up and you can sell it at any point in time along this curve and this will provide you the profit that we're discussing. During backwardation the futures price is going to decrease future further in the future purchasing it later for an investor would be a greater profit. So the longer you wait as it gets closer to maturity and he would be I'm tinsel as it gets closer to the expiry date so as I started here you're going to have a lot more risk involved. This is what they're talking about you're basically eliminating the risk and the loss for significant losses. And the price of the futures contracts would be $55 for the future depending on whatever the maturity is here the price is higher than the current spot price which means it's a in a contango curve scenario. The future price is lower than the current spot price hence a backwardation curve. Now this doesn't mean. Just because you're able to let's say isolate and locate a specific curve and opportunity within a particular asset or commodity this doesn't mean that you should go out and buy futures if it's below the physical price of a commodity or sell them if the futures price are trading higher. This is nothing more than an identifier this gives you information okay and when I get into the next slide I'll be able to get into further detail but it's based on supply and demand and it's telling you what the market is doing what the market is wanting or needing either supply is in more than the demand or there's more demand than the supply that the market is able to provide so the market is more sophisticated and these are why uh this is not plain vanilla type of securities where uh you think you can get it and make lots of money quickly and not know what's going on with the futures contracts the dynamics the mechanics and the sophistications sophistication involved in futures contracts they really really need to be understood thoroughly uh before you get involved in them so the market is more sophisticated and uh than that but this is one example of a strategy one could use and monitor constantly in some circumstances so to trade or invest in futures you need to have a starting point based on understanding the tick value and the risks involved uh well now you have a strategy starting point and bullish okay what type of curve scenario are we looking at is that a contango curve situation or is it a backwardation curve scenario and then based on history on that specific asset or commodity for example i'm in a similar type of situation uh can it contango and a rising interest rate environment which we're in interest rates have not been increased the amount that they've been increased this year that inflation from the US market is at its highest level in the last 40 years the official rate percent as the CPI indicator saying where core inflation is real inflation most likely is closer to 10 percent if not higher what does that mean you're talking about an increase in interest rates men basically zero the window can it zero to 25 basis points at the beginning of the year 75 basis points la 1 percent now and forecasted to be 2.75 to 3 by the end of the year so we are in an increased interest rate increasing interest rate environment so in order for us to use these curves let's say in a like for like situation we have to go back and find an interest rate increase environment based on the same commodity or asset that you wanting to get a position in whether you're hedging and or speculating and find similarities to say okay uh as about the interest rates per america and it but then they did what they started decreasing the interest rates because of the housing collapse in the bubble to the zero rate of interest rate environment that we've been in basically for the last six years plus or minus uh they increased rates one time under trump's administration and then they turned around and decreased them at the next fed meeting to bring it back down to where it was but now uh but at that time mutton so inflation under official data can it buy the ban name but me letting us be me hulla inflation started to many facilities to be me and it's still increasing so what does that tell us interest rates in the in the short term in the short term most likely they will not be decreasing anytime soon if anything they're going to continue to hike and increase until the fed feels that the economy should be let's say stable enough uh to accommodate where the inflation is and bring it down will this play out according to plan only time will tell there is no crystal ball but we can look back historically and see what what's taking place so uh knowing where your starting point can be here markets are fluid and constantly changing so decide if leverage derivatives fit your risk profile before you commence trading as the risk of loss is significant fee is a fee when you don't have an exit point or stop loss on your position the losses can be tremendous uh at the same time uh you've got to have your entry exit point your stop loss points and you've got to be consistent in your analyzation and the tools that i'm informing you with tonight uh are a very good starting point to identify possible scenarios for you to enter the market okay now getting back to regarding the supply and demand of of the of the markets in simple explanation of the dynamics in essence the term structure of commodity futures or the commodity curves are reflection underlying the supply and demand dynamics and what contango and backwardation curves signify what a contango in a usual context okay a usual feature of a normal market or if the contango market is very steep spot prices meaning too low versus the future price it denotes a bearish market what's a bearish market a bearish market means there's more shoe there's more sellers than there are buyers a bullish market or uptrend means that there's more buyers than sellers so if you identify a contango curve and you see that there's a very steep disconnect between the spot price and the future price it usually denotes a bearish market why is this the case because no one wants the commodity today there's poor demand or there's too much supply at the spot rates so then it gets back to supply and demand where's the supply it could be too much and at the same time nobody wants to pay the price that the spot is trading at so if you have the supply and nobody is buying what does that mean well you have a contango curve situation backwardation is an unusual market when i say unusual which denotes the underlying bullish trend bullish commandment and a bullish market meaning there's more buyers than sellers a very deep backwardation curve signifies that the market is witnessing a serious boost or supply squeeze spot prices or near futures prices rise very fast because buyers want to ensure their supply so shuman at the home bitcoin you have your supply and if you have a very steep backwardation curve so it's going to look like like this in your case versus a relative usual backwardation curve it's going to be very steep that means you're going to have the spot prices here there could be a squeeze okay meaning what we could be seeing now in raw materials in raw materials like aluminum steel at the energy prices the the prices have spiked is part of the let's say scenario or part of the bigger picture here be considered one minimum two generations okay okay plus or minus panning living in between $30 per gallon okay now all of a sudden the some of the cheaper states or lower income state America and the more expensive states and they rely on their purchasing power on their money supply or cash flow so is a cash flow they're not getting raises or they're not getting bonuses and the consumer from a consumer driven market on their purchasing power is decreasing leish so now as you're going to see most likely the US market contract because they're going to start spending the American consumer is going to start spending on the necessities consumer staples benzene but they might start scaling back most likely on the non-consumables cyclicals or luxury items depending on what type of income bracket you're in so that now they're saying wallah allah benzene amtigla we're not going to go to the cinema for instead of going twice a month maybe we'll only go once every two months or they end up re-budgeting based on their cash flow from paycheck to paycheck because the meat of shawley ailey or show us what the fuck fear that we're not a sheen home in lebanon and a rampant inflation uh in the mission I know uh in the mission in lebanon I know uh home bus now sheen be what I mean the man is the worst economic uh disaster in human civilization since 1850 so uh to put it in relative terms they wouldn't understand how things are changing so fast on a daily basis but on a larger uh on the largest market in the most stable market when you have prices increasing and in clips at a time and they're feeling the pinch then it's going to have a water down effect on everything else that takes place uh within the market itself uh so this is what we mean when we're looking at identifying a contango curve versus a backwardation curve what type of environment are we in now being able to retrace find uh historically speaking within the markets uh and be able to find uh via research and analyzation okay where are some trends that we could identify that could be profitable trades and or profitable hedges to protect the portfolio that we are currently managing and involved in now at the moment and last but not least I always like to leave the webinar with a famous quote and I've said this before as part of doing your research understand what you get involved in know why uh know how to protect yourself uh etc etc and this quote comes from peter lynch uh an american a famous american investor mutual fund manager and philanthropist know what you own and know why you own it and he's a bit of a fear my feet on photo the futures contracts without understanding oh would she the sophistication involved in the futures contracts how they operate and what sector you're operating in the volatility the liquidity the look how deep is the liquidity in the particular asset that you're involved in how easy is it to get in and out to close positions at the same time what is the outlook based on the current market situation that we're involved in now and then getting back to before taking any type of position with a futures contract take a look at your own portfolio and or trading account look at what you own and answer the question to yourself why do you own x y z in your account can you answer this question can you answer why you own what you own in your portfolio okay if you can't then you need to reassess and i don't might be able to get into job but shaman and old woman square one but you need to reassess or unwind your portfolio and start building an educated research based account trading account and or portfolio knowing the information that you have now based on the webinar series of knowing how to use futures contracts to help benefit the the and compound your profitability you want to win more than you lose you're not going to win every single particular position it's impossible but if you're looking at the bottom line where you have more profitable trades and the profitable column than you do in the in the loss column then that's the outcome that we're looking for and it all goes back to knowing what you're doing knowing what you own why you're in it and then how to better position yourself to protect yourself for the downside while not being greedy on the upside now with that being said i will leave it here i'll open up the floor for any questions that anybody may have please go ahead and show them in the chat and see if i can find where the chat room went first of all do we have any any questions going once going twice perfect but the shaker but the shaker gone for your time for all of you saying thank you i hope but you find this helpful and insightful i'll have we'll have another webinar inshallah espoir jair in harita leta come in i'm getting into the more more semantics and details so that i can provide you with the informational tools needed to better inform you so that you can make informed decisions and please go back adnan on the chat room had the link for the previous webinars elisarum and abili and there are seven previous ones that you own candidate daemon so you can go back and start from the first one up until now i've tried to lay it out each webinar in the most simplistic way uh to get you up to speed of understanding shohan the key key from req bean and how to use them and now we're getting into a little more of the sophistication part of identifying possible patterns or entry or exit points and and within the specific markets whether they're commodities indices or otherwise and help you make you some money inshallah that's the whole point so thank you all have a good evening and i will look forward to seeing you again next week have a good week good luck with the markets careful it's choppy the markets today are in an upswing the dow is up 300 points s and p is up 60 points oil is about flat at 113 gold is about flat at 1819 and but for the most part we're seeing a rebound in the u.s markets so we'll see if that's able to continue for the rest of the week considering that we had six bloody days in a row prior uh we'll see what happens but uh keep uh your mind in the game stay focused stay sharp and see you next week have a good evening to spot a good