Futures Trading Contracts And Futures Market Exchanges

Contracts in the futures market are between a buyer and seller. The contract states that the seller must provide the buyer a very specific quantity of a certain item, such as cotton, oil etc, for a price agreed today, but at a date in the future.

To make money trading futures you need to be a buyer of the contract if you think the value of the commodity is going to go up, and a seller of the contract if you think it will go down. The settlement takes place at a future date but you always have to buy and sell at todays prices.

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.

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.

Normally the farmer and the merchant will form a contract early in the season long before harvest time for the price of the crop, this is in effect a futures contract. Both the farmer and the merchant are able to reduce their trading risks in this way.

The type of futures contract that you are trading is usually determined by the underlying asset, which could be either commodity based or financial based, such as stocks or bonds. This is a big change from the origins in the farming market.

There are a number of major Futures Exchanges, The Chicago Board of Trade (CBOT) was established in 1848 to allow farmers and merchants to negotiate future prices for their produce. The main task of the exchange was to standardize the quantity and quality of the produce that was traded. CBOT now offers futures contracts on many different underlying assets, including corn, oats, soybeans, wheat, silver and Treasury bonds.

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.

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.

The German Bund was a very heavily traded financial contract and one of the biggest markets on the LIFFE.

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.

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