Question

When a futures contract is traded on the floor of the exchange, it may be the case that the open interest increases by one, stays the same, or decreases by one.

Explain this statement.

Answer 1

The open interest of a futures contract may increase, stay the same, or decrease when traded on the exchange floor.

Step-by-step explanation:

When a futures contract is traded on the floor of the exchange, the open interest may increase by one, stay the same, or decrease by one.

If a new trader enters into a futures contract, the open interest will increase by one because there is now one additional contract in existence.

If an existing trader sells their futures contract to another trader, the open interest remains the same because the contract is simply changing hands.

If an existing trader exits their futures contract without another trader entering into a new contract, the open interest will decrease by one because there is now one less contract in existence.