Futures Market Exchanges And Futures Contracts

Posted by 1nspire

March 28, 2008

by James J. Dehoiver

A futures contract is a legally binding agreement between a buyer and a seller that calls for the seller to deliver to the buyer a specified quantity (and quality, for commodities) of a specific asset at a future date for a price agreed today.

The important point to remember when trying to trade futures for a profit is that it is the current price that is being traded and not the settlement price, which is at the future date. This means we want to be buyers of the contract if we think that the price will increase, and sellers of the contract if it looks like it is going down.

If I buy (or sell) a futures contract today, I don’t have to hold it until the contract expires, I can simply choose to sell it (or buy it) in the market at the prevailing price. Futures contracts are bought and sold in the regulated environment of a futures exchange, such as the Chicago Board of Trade (CBOT) in the U.S. and the London International Futures and Options Exchange (LIFFE) in the U.K.

The futures market was originally started to help people like farmers and merchants manage the risk of their products against the potential supply and demand of the market. In farming for example when there is a bumper crop of say corn the price can fall dramatically and hurt the farmer, but if they have already sold a contract at a certain price they can still get a fair price for their products.

The coffee merchant also experiences the same turbulence in prices due to fluctuating supply and demand. The only difference is that a good price for the farmer is bad for the merchant and vice versa. If neither the farmer nor the merchant knows what the price of beans will be at harvest time, it is difficult for them as they do not know how much money they can spend now in anticipation of future profits.

By using a form of futures contract long before harvest time both the farmer and the merchant can reduce their risks by setting the price.

Today the futures market has changed a lot from the historical origins. There are now futures contracts on financial instruments such as stocks and bonds. broadly speaking futures contracts are split between commodity type products and financial type products. It is usually not that important because they are rarely held until expiration.

The CBOT was started in 1848 for the benefit of the farmers and merchants. The exchange was to regulate both the quality and quantity of the actual crop that was being traded. Today the CBOT offers many contracts on items like wheat, silver, corn, bonds and soybeans.

The Chicago Mercantile Exchange (CME) was created in 1919 and has managed a futures market in such things as pork bellies, live cattle and the SP500 index.

In London the big financial futures exchange is the London International Futures and Options Exchange (LIFFE). Here financial instruments such as the FTSE100, the GILT and Short Sterling are traded, the exchange is relativily new and opened in 1982.

EUREX started life as the DTB, the German futures exchange. The DTB has always been an electronic exchange and started back in 1990, when electronic exchanges were still considered to be inferior to the open outcry system.

One of the biggest futures markets in the world was the German Bund, which, during the first half of the 90’s, was the biggest contract traded on LIFFE. The Bund pit on the floor of LIFFE was the biggest and the most active, it was the heart of the trading floor. The Bund was also traded on the DTB, but in much smaller quantities.

Many markets in futures have very high volumes and hence very good liquidity, these are attractive markets for traders. The high leverage means that profits can be made very fast when the market moves, however money can also be lost very fast. If you are even thinking of trading futures make sure that you learn as much as you can before using real money.

About the Author:

James J. Dehoiver is an expert futures trader and will teach you how to day trade futures as well as some advanced futures options strategies, checkout his site today.

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