Futures Trading

FUTURES CONTRACTS

A legally binding, standardized agreement to buy or sell a standardized commodity, specifying quantity and quality at a set price on a future date. Some futures contracts, such as the CME Live Cattle and CME British Pound contracts, call for physical delivery of the commodity. Other futures contracts, such as the CME S&P 500 and CME Eurodollar contracts, are cash-settled and do not have a physical delivery provision. If these contracts are not liquidated by the Last Trading Day, the position is closed out by comparing the position’s price against a special Final Settlement Price, and debiting or crediting the position accordingly.

How Do Futures Markets Benefit Society?

The futures markets can help manage the risks that are part of doing business. This can mean lower costs to you as a consumer, because a well-run business is usually able to bring its goods and services to market more efficiently at a lower cost. The fewer risks a business has to take, the lower the end price it needs to make a profit. That,s really the free enterprise system at its best, and futures markets play a vital role in this process.

Also, firms that manage their risks tend to be more dependable employers. If you work for a company that deals with overseas customers or suppliers, for example, you have an interest in how well your company copes with foreign exchange rates and how well it manages the risk of fluctuating interest rates to protect its profits. Hedging with futures can assist with this
aspect of your employer’s operations.

Naturally, if you work for a futures exchange or a firm involved in trading, futures markets are particularly important to you. Futures markets are a part of the business scene in this country. Used knowledgeably and appropriately, futures and options markets can be a valuable asset in the business of doing business, which affects each of us.

Global Perspective
We’ve been talking about the structure and function of U. S. futures exchanges, but the picture would not be complete without taking a look at the world outside of Chicago and New York.

In fact, while there are just nine futures exchanges in the U.S. today, there are more than 50 futures exchanges elsewhere. The exchanges outside the U.S. now do over 65% of global futures business; U.S. exchanges do 35%. So although Chicago provided the prototype or model for futures markets, you really have to look around the world to get an accurate perspective of today’s futures trading industry.

For example, while open outcry on a trading floor is still the U.S. model, the majority of trading on exchanges abroad is done electronically. Just as other countries may have initially learned futures from Chicago, Chicago and other U.S. exchanges are now learning from the rest of the world. It wasn’t until the early 1990s that some major U.S. exchanges first began allowing electronic trading of their products after their floors shut down each day. Now, at CME, virtually all contracts trade at some point electronically each trading day, and specific products (such as the CME E-mini S&P 500 and CME E-mini NASDAQ-100 futures contracts) trade only electronically, never through open outcry on the trading floors.

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