The open interest in a futures contract changes from day to day. Suppose investo

Question

The open interest in a futures contract changes from day to day. Suppose investors holding long positions are divided into two groups: A is an individual investor and OL represents other investors. Investors holding short positions are denoted as S. Currently, A holds 1,000 contracts and OL holds 4,200; thus, S is short 5,200 con- tracts. Determine the holdings of A, OL, and S after each of the following transactions. Treat each transaction independently. For example, the transaction in b ignores the transaction in a.

A sells 500 contracts; OL buys 500 contracts
b. A buys 700 contracts; OL sells 700 contracts

c. A buys 200 contracts; S sells 200 contracts

d. A sells 800 contracts; S buys 800 contracts

What determines whether new volume increases or decreases the open interest?

Explanation / Answer

Soln : a) Total no. of contracts with A = 1000 and OL = 4200

Now, A sells 500 contracts OL buys 500 contracts. Holding of A after this = 500 contracts

OL holds = 4700 contracts and Investors holding S short contracts = 5200

b. A buys 700 contracts means A holds 1700 contracts, while OL sells 700 contracts , OL holds = 3500 contracts. Investors still holds 5200 short contracts.

c. A buys 200 contracts , A holds = 1200 contracts , while the S holding of short increased to 5400 contracts.

d. A sells 800 contracts means kept only 200 contracts, S buys those 800 contracts , Investors holds now only 4400 contracts.

For open interest new volume increase depend upon the trade type or trading volume has increased.

Like in part D here the open interest will decrease as the contracts sold back to investors will cease to exist. While in other parts, it will remain unchanged.

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