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Futures Market Exchanges And Futures Contracts

Mar 28, 2008
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.

When a contract is either bought or sold you don't have to hold it until the settlement date. It is easier to either sell or buy it when there is a profit in the trade, at the current market price. There are a number of exchanges that regulate the buying and selling of futures contracts such as the CBOT (The Chicago Board Of Trade) and the LIFFE (The London International Futures And Options Exchange.

Futures were originally developed to help offset the risks and uncertainties experienced by farmers and merchants due to the fluctuating supply and demand for produce. Take for example a coffee plantation farmer. The price that he will receive for his beans will vary according to the vagaries of supply and demand. In a year when supplies are limited and demand is high, prices will be high. In a year when demand falls and the supply is plentiful, the price will fall.

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.

It makes sense for the farmer and the merchant to get together early in the season and agree the price to be paid for the produce at harvest time. This way the farmer can plan his expenses and the merchant can set his prices. In effect they are negotiating a type of futures contract, which provides them a way of eliminating the risk they face due to the uncertain future price of coffee beans.

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.

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.

The London International Futures and Options Exchange (LIFFE) was founded in 1982. Futures markets traded on LIFFE include the FTSE100, the GILT and Short Sterling. LIFFE has experienced huge growth, over 40% a year, since it started. In 2001 a record 216 million contracts were traded, representing approximately 96 trillion in value.

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.

Currencies are also traded as futures, the dollar, pund and Euro are very heavily traded.

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