TeachMeFinance.com - explain Ringing out
Ringing out -- This is an operation by which a transaction
in a future in grain, cotton, coffee or other commodity may be
concluded before the maturity of the contract.
Illustration : A sells to B for delivery in some stipulated
month in the future. B sells to C, C sells to D and D sells
to A. Thus a ring is formed. Each has bought and sold and
no actual delivery is required.
In a transaction in a future each party to it (the buyer as
well as the seller) deposits a margin with a designated depository
as security for the performance of his part of the
contract. When the ring is complete a common settling price
is fixed by the proper authority of the exchange on which the
transaction took place.
Say A sold at 12 and bought back at 10.5 the difference is
1.5 in his favor. The settling price is 11, say. Since A sold
to B at 12 he collects the difference between 12 and 11, which
is 1, from B. Then, since he bought from D at 10.5 he collects
the difference between 10.5 and 11, which is .5, from
D. Thus, between B and D he collects his total difference.
But suppose A had sold at 10.5 and bought back at 12.
Then, he would pay B 0.5 and pay D 1.
Contracts in stocks w. i. (when issued - see When issued)
are also ringed out in the same manner as contracts in futures
in grain, cotton, coffee, etc.
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