All About The Futures Market Contracts And Exchanges

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.

It is important not to get confused about what the word future refers to. Futures traders are not trading future prices, we are trading today’s prices, but the settlement is taking place in the future. So we buy if we think prices will increase and sell if we think prices will drop.

Futures contracts are regulated by a number of large exchanges such as the the CBOT and the LIFFE. When you either buy or sell a contract most traders do not hold it until the settlement date, but usually will close the contract for a profit when the market moves in their favor.

The origins of the futures markets can be traced back to farmers and merchants who wanted method managing the risks in their business against bad weather or failed crops. The use of futures contracts helps them to maintain a more constant price for their products when the demand can vary a lot.

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.

Futures markets have evolved to include markets whose underlying asset is a financial asset, such as a bond or a portfolio of stocks. Most of the contracts traded can be classified as either commodity futures or financial futures, depending on whether the underlying asset is a commodity or a financial asset.

It is important that both the quality and quantity of the produce in the contracts is regulated carefully, this is why the CBOT was founded in 1848. They now regulate many items which are as diverse as silver, corn and bonds

The CME was started in 1919, it’s main purpose was to enable a futures market in such items as pork bellies and live cattle. Today it also regulates the S&P500 stock index which is a very popular index for traders, including day traders.

Another large futures exchange is the London International Futures and Options Exchange (LIFFE) which started in 1982. It has grown very fast since then and financial products like the FTSE100, the GILT and Short Sterling trade on that exchange.

In Germany the EUREX is a big exchange and is 100% electronic, it started out as the DTB in 1990 before electronic systems became popular, at the time open outcry pits systems were still in use by many exchanges.

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 master futures trader and will teach you how to day trade futures as well as some delta neutral futures strategies, visit his website now.