TheInfoList

OR:

In
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fin ...
, a futures contract (sometimes called a futures) is a standardized legal
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to ...
to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
transacted is usually a
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a ...
or
financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
. The predetermined price of the contract is known as the ''forward price''. The specified time in the future when delivery and payment occur is known as the ''delivery date''. Because it derives its value from the value of the underlying asset, a futures contract is a
derivative In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. ...
. Contracts are traded at
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
s, which act as a marketplace between buyers and sellers. The buyer of a contract is said to be the
long Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music men ...
position holder and the selling party is said to be the short position holder. As both parties risk their counter-party reneging if the price goes against them, the contract may involve both parties lodging as security a margin of the value of the contract with a mutually trusted third party. For example, in gold futures trading, the margin varies between 2% and 20% depending on the volatility of the
spot market The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In a spot market, ...
. A stock future is a cash-settled futures contract on the value of a particular
stock market index In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance. Two of the ...
. Stock futures are one of the high risk trading instruments in the market. Stock market index futures are also used as indicators to determine market sentiment. The first futures contracts were negotiated for agricultural commodities, and later futures contracts were negotiated for natural resources such as oil. Financial futures were introduced in 1972, and in recent decades, currency futures, interest rate futures,
stock market index future In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for ...
s, and cryptocurrency perpetual futures have played an increasingly large role in the overall futures markets. Even organ futures have been proposed to increase the supply of transplant organs. The original use of futures contracts was to mitigate the risk of price or exchange rate movements by allowing parties to fix prices or rates in advance for future transactions. This could be advantageous when (for example) a party expects to receive payment in foreign currency in the future and wishes to guard against an unfavorable movement of the currency in the interval before payment is received. However, futures contracts also offer opportunities for
speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many ...
in that a trader who predicts that the price of an asset will move in a particular direction can contract to buy or sell it in the future at a price which (if the prediction is correct) will yield a profit. In particular, if the speculator is able to profit, then the underlying commodity that the speculator traded would have been saved during a time of surplus and sold during a time of need, offering the consumers of the commodity a more favorable distribution of commodity over time.

Origin

The
Dōjima Rice Exchange The Dōjima Rice Exchange (堂島米市場, ''Dōjima kome ichiba'', 堂島米会所, ''Dōjima kome kaisho''), located in Osaka, was the center of Japan's system of rice brokers, which developed independently and privately in the Edo period ...
, first established in 1697 in
Osaka is a designated city in the Kansai region of Honshu in Japan. It is the capital of and most populous city in Osaka Prefecture, and the third most populous city in Japan, following Special wards of Tokyo and Yokohama. With a population of 2. ...
, is considered by some to be the first
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
market, to meet the needs of
samurai were the hereditary military nobility and officer caste of medieval and early-modern Japan from the late 12th century until their abolition in 1876. They were the well-paid retainers of the '' daimyo'' (the great feudal landholders). They ha ...
who—being paid in rice—needed a stable conversion to coin after a series of bad harvests. The
Chicago Board of Trade The Chicago Board of Trade (CBOT), established on April 3, 1848, is one of the world's oldest futures and options exchanges. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other exc ...
(CBOT) listed the first-ever standardized 'exchange traded' forward contracts in 1864, which were called futures contracts. This contract was based on
grain A grain is a small, hard, dry fruit (caryopsis) – with or without an attached hull layer – harvested for human or animal consumption. A grain crop is a grain-producing plant. The two main types of commercial grain crops are cereals and legum ...
trading, and started a trend that saw contracts created on a number of different
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
as well as a number of futures exchanges set up in countries around the world. By 1875 cotton futures were being traded in
Bombay Mumbai (, ; also known as Bombay — the official name until 1995) is the capital city of the Indian state of Maharashtra and the ''de facto'' financial centre of India. According to the United Nations, as of 2018, Mumbai is the secon ...
in India and within a few years this had expanded to futures on edible oilseeds complex, raw
jute Jute is a long, soft, shiny bast fiber that can be spun into coarse, strong threads. It is produced from flowering plants in the genus ''Corchorus'', which is in the mallow family Malvaceae. The primary source of the fiber is '' Corchorus ol ...
and jute goods and
bullion Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes from ...
. In the 1930s two thirds of all futures was in wheat. The 1972 creation of the
International Monetary Market The International Monetary Market (IMM), a related exchange created within the old Chicago Mercantile Exchange and largely the creation of Leo Melamed, was one of four divisions of the CME Group (CME), the largest futures exchange in the United St ...
(IMM) by the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an ...
was the world's first financial futures exchange, and launched currency futures. In 1976, the IMM added interest rate futures on US
treasury bills United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. go ...
, and in 1982 they added
stock market index future In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for ...
s.

Risk mitigation

Although futures contracts are oriented towards a future time point, their main purpose is to mitigate the risk of default by either party in the intervening period. In this vein, the futures exchange requires both parties to put up initial cash, or a performance bond, known as the margin. Margins, sometimes set as a percentage of the value of the futures contract, must be maintained throughout the life of the contract to guarantee the agreement, as over this time the price of the contract can vary as a function of supply and demand, causing one side of the exchange to lose money at the expense of the other. To mitigate the risk of default, the product is marked to market on a daily basis where the difference between the initial agreed-upon price and the actual daily futures price is re-evaluated daily. This is sometimes known as the variation margin, where the futures exchange will draw money out of the losing party's margin account and put it into that of the other party, ensuring the correct loss or profit is reflected daily. If the margin account goes below a certain value set by the exchange, then a margin call is made and the account owner must replenish the margin account. On the delivery date, the amount exchanged is not the specified price on the contract but the spot value, since any gain or loss has already been previously settled by marking to market.

Margin

To minimize counterparty risk to traders, trades executed on regulated
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
s are guaranteed by a
clearing house Clearing house or Clearinghouse may refer to: Banking and finance * Clearing house (finance) * Automated clearing house * ACH Network, an electronic network for financial transactions in the U.S. * Bankers' clearing house * Cheque clearing * ...
. The clearing house becomes the buyer to each seller, and the seller to each buyer, so that in the event of a counterparty default the clearer assumes the risk of loss. This enables traders to transact without performing
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It can be a l ...
on their counterparty. Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a ...
or spread traders who have offsetting contracts balancing the position. Clearing margin are financial safeguards to ensure that companies or corporations perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers. Customer margin Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance bond margin. Initial margin is the equity required to initiate a futures position. This is a type of performance bond. The maximum exposure is not limited to the amount of the initial margin, however, the initial margin requirement is calculated based on the maximum estimated change in contract value within a trading day. The initial margin is set by the exchange. If a position involves an exchange-traded product, the amount or percentage of the initial margin is set by the exchange concerned. In case of loss or if the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as "variation margin", margin called, for this reason, is usually done on a daily basis, however, in times of high volatility, a broker can make a margin call intra-day. Margin calls are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed out the client is liable for any resulting deficit in the client's account. Some U.S. exchanges also use the term "maintenance margin", which in effect defines how much the value of the initial margin can reduce before a margin call is made. However, most non-US brokers only use the term "initial margin" and "variation margin". The Initial Margin requirement is established by the Futures exchange, in contrast to other securities' Initial Margin (which is set by the Federal Reserve in the U.S. Markets). A futures account is marked to market daily. If the margin drops below the margin maintenance requirement established by the exchange listing the futures, a margin call will be issued to bring the account back up to the required level. Maintenance margin A set minimum margin per outstanding futures contract that a customer must maintain in their margin account. Margin-equity ratio is a term used by speculators, representing the amount of their trading capital that is being held as margin at any particular time. The low margin requirements of futures results in substantial leverage of the investment. However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower. A trader, of course, can set it above that, if he does not want to be subject to margin calls. Performance bond margin The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure the performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit. Return on margin (ROM) is often used to judge performance because it represents the gain or loss compared to the exchange's perceived risk as reflected in the required margin. ROM may be calculated (realized return) / (initial margin). The Annualized ROM is equal to (ROM+1)(year/trade_duration)-1. For example, if a trader earns 10% on margin in two months, that would be about 77% annualized.

Settlement − physical versus cash-settled futures

Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: * Physical delivery − the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. Most are canceled out by purchasing a covering position—that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). The Nymex crude futures contract uses this method of settlement upon expiration * Cash settlement − a cash payment is made based on the underlying reference rate, such as a short-term interest rate index such as 90 Day T-Bills, or the closing value of a
stock market index In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance. Two of the ...
. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires. Cash settled futures are those that, as a practical matter, could not be settled by delivery of the referenced item—for example, it would be impossible to deliver an index. A futures contract might also opt to settle against an index based on trade in a related spot market.
ICE Ice is water frozen into a solid state, typically forming at or below temperatures of 0 degrees Celsius or Depending on the presence of impurities such as particles of soil or bubbles of air, it can appear transparent or a more or less o ...
Brent Brent may refer to: * Brent (name), an English given and surname Place name ;In the United States * Brent, Alabama * Brent, Florida * Brent, Georgia * Brent, Missouri, a ghost town * Brent, Oklahoma ;In the United Kingdom * Brent, Cornwall ...
futures use this method. Expiry (or Expiration in the U.S.) is the time and the day that a particular delivery month of a futures contract stops trading, as well as the final settlement price for that contract. For many equity index futures and interest rate futures as well as for most equity (index) options, this happens on the third Friday of certain trading months. On this day the ''back month'' futures contract becomes the ''front-month'' futures contract. For example, for most CME and CBOT contracts, at the expiration of the December contract, the March futures become the nearest contract. During a short period (perhaps 30 minutes) the
underlying In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be use ...
cash price and the futures prices sometimes struggle to converge. At this moment the futures and the underlying assets are extremely liquid and any disparity between an index and an underlying asset is quickly traded by arbitrageurs. At this moment also, the increase in volume is caused by traders rolling over positions to the next contract or, in the case of equity index futures, purchasing underlying components of those indexes to hedge against current index positions. On the expiry date, a European equity arbitrage trading desk in London or Frankfurt will see positions expire in as many as eight major markets almost every half an hour.

Pricing

When the deliverable asset exists in plentiful supply or may be freely created, then the price of a futures contract is determined via
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between th ...
arguments. This is typical for stock index futures, treasury bond futures, and futures on physical commodities when they are in supply (e.g. agricultural crops after the harvest). However, when the deliverable commodity is not in plentiful supply or when it does not yet exist — for example on crops before the harvest or on
Eurodollar Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the U.S. Federal Reserve. Consequently, such deposits are subject to much less regulation th ...
Futures or
Federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
futures (in which the supposed underlying instrument is to be created upon the delivery date) — the futures price cannot be fixed by arbitrage. In this scenario, there is only one force setting the price, which is simple
supply and demand In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or ...
for the asset in the future, as expressed by supply and demand for the futures contract.

Arbitrage arguments

Arbitrage arguments ("
rational pricing Rational pricing is the assumption in financial economics that asset prices - and hence asset pricing models - will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is us ...
") apply when the deliverable asset exists in plentiful supply or may be freely created. Here, the forward price represents the expected future value of the underlying discounted at the
risk-free rate The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations. Since the risk-free ra ...
—as any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged away. We define the forward price to be the strike K such that the contract has 0 value at the present time. Assuming interest rates are constant the forward price of the futures is equal to the forward price of the forward contract with the same strike and maturity. It is also the same if the underlying asset is uncorrelated with interest rates. Otherwise, the difference between the forward price on the futures (futures price) and the forward price on the asset, is proportional to the covariance between the underlying asset price and interest rates. For example, a futures contract on a zero-coupon bond will have a futures price lower than the forward price. This is called the futures "convexity correction". Thus, assuming constant rates, for a simple, non-dividend paying asset, the value of the futures/forward price, ''F(t,T)'', will be found by compounding the present value ''S(t)'' at time ''t'' to maturity ''T'' by the rate of risk-free return ''r''. :$F\left(t,T\right) = S\left(t\right)\times \left(1+r\right)^$ or, with '' continuous compounding'' :$F\left(t,T\right) = S\left(t\right)e^ \,$ This relationship may be modified for storage costs ''u'', dividend or income yields ''q'', and convenience yields ''y''. Storage costs are costs involved in storing a commodity to sell at the futures price. Investors selling the asset at the spot price to arbitrage a futures price earns the storage costs they would have paid to store the asset to sell at the futures price. Convenience yields are benefits of holding an asset for sale at the futures price beyond the cash received from the sale. Such benefits could include the ability to meet unexpected demand, or the ability to use the asset as an input in production. Investors pay or give up the convenience yield when selling at the spot price because they give up these benefits. Such a relationship can be summarized as: :$F\left(t,T\right) = S\left(t\right)e^ \,$ The convenience yield is not easily observable or measured, so ''y'' is often calculated, when ''r'' and ''u'' are known, as the extraneous yield paid by investors selling at spot to arbitrage the futures price. Dividend or income yields ''q'' are more easily observed or estimated, and can be incorporated in the same way: :$F\left(t,T\right) = S\left(t\right)e^ \,$ In a perfect market, the relationship between futures and spot prices depends only on the above variables; in practice, there are various market imperfections (transaction costs, differential borrowing, and lending rates, restrictions on short selling) that prevent complete arbitrage. Thus, the futures price in fact varies within arbitrage boundaries around the theoretical price.

Pricing via expectation

When the deliverable commodity is not in plentiful supply (or when it does not yet exist) rational pricing cannot be applied, as the arbitrage mechanism is not applicable. Here the price of the futures is determined by today's
supply and demand In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or ...
for the underlying asset in the future. In an efficient market, supply and demand would be expected to balance out at a futures price that represents the present value of an unbiased expectation of the price of the asset at the delivery date. This relationship can be represented as:: :$F\left(t\right) = E_t\left\e^$ By contrast, in a shallow and illiquid market, or in a market in which large quantities of the deliverable asset have been deliberately withheld from market participants (an illegal action known as
cornering the market In finance, cornering the market consists of obtaining sufficient control of a particular stock, commodity, or other asset in an attempt to manipulate the market price. One definition of cornering a market is "having the greatest market share in ...
), the market clearing price for the futures may still represent the balance between supply and demand but the relationship between this price and the expected future price of the asset can break down.

Relationship between arbitrage arguments and expectation

The expectation-based relationship will also hold in a no-arbitrage setting when we take expectations with respect to the risk-neutral probability. In other words: a futures price is a martingale with respect to the risk-neutral probability. With this pricing rule, a speculator is expected to break even when the futures market fairly prices the deliverable commodity.

Contango, backwardation, normal and inverted markets

The situation where the price of a commodity for future delivery is higher than the expected
spot price In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the ...
is known as
contango Contango is a situation where the futures price (or forward price) of a commodity is higher than the ''expected'' spot price of the contract at maturity. In a contango situation, arbitrageurs or speculators are "willing to pay more owfor a co ...
. Markets are said to be normal when futures prices are above the current spot price and far-dated futures are priced above near-dated futures. The reverse, where the price of a commodity for future delivery is lower than the expected spot price is known as
backwardation Normal backwardation, also sometimes called backwardation, is the market condition where the price of a commodity's forward or futures contract is trading below the ''expected'' spot price at contract maturity. The resulting futures or forward ...
. Similarly, markets are said to be inverted when futures prices are below the current spot price and far-dated futures are priced below near-dated futures.

Futures contracts and exchanges

Contract

There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities (such as
single-stock futures In finance, a single-stock future (SSF) is a type of futures contract between two parties to exchange a specified number of stocks in a company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified f ...
), currencies or intangibles such as interest rates and indexes. For information on futures markets in specific underlying commodity markets, follow the links. For a list of tradable commodities futures contracts, see List of traded commodities. See also the
futures exchange A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
article. *
Foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
– see Currency future *
Money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compo ...
– see Interest rate future *
Bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, ...
– see Interest rate future * Equity market - see
Stock market index future In finance, a stock market index future is a cash-settled futures contract on the value of a particular stock market index. The turnover for the global market in exchange-traded equity index futures is notionally valued, for 2008, by the Bank for ...
and
Single-stock futures In finance, a single-stock future (SSF) is a type of futures contract between two parties to exchange a specified number of stocks in a company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified f ...
*
Commodity market A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investin ...
*
Cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It ...
– see Perpetual futures Trading on
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. Although contract trading began with traditional commodities such as grains, meat, and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates, and private interest rates.

Exchanges

Contracts on financial instruments were introduced in the 1970s by the
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an ...
(CME) and these instruments became hugely successful and quickly overtook commodities futures in terms of trading volume and global accessibility to the markets. This innovation led to the introduction of many new futures exchanges worldwide, such as the
London International Financial Futures Exchange The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life') was a futures exchange based in London. In 2014, following a series of takeovers, LIFFE became part of Intercontinental Exchange, and was renamed ICE ...
in 1982 (now Euronext. liffe), Deutsche Terminbörse (now
Eurex Eurex Exchange is an international exchange which primarily offers trading in European based derivatives. It is the largest European futures and options market. The products traded on this exchange vary from German and Swiss debt instruments to E ...
) and the
Tokyo Commodity Exchange Tokyo Commodity Exchange, also known as TOCOM, is Japan's largest and one of Asia's most prominent commodity futures exchanges. TOCOM operates electronic markets for precious metals, oil, rubber and soft commodities. It offers futures and options ...
(TOCOM). Today, there are more than 90 futures and futures options exchanges worldwide trading to include: *
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset clas ...
(CBOT and CME) -- Currencies, Various Interest Rate derivatives (including US Bonds); Agriculture (Corn, Soybeans, Soy Products, Wheat, Pork, Cattle, Butter, Milk); Indices ( Dow Jones Industrial Average, NASDAQ Composite,
S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
, etc.); Metals (Gold, Silver).
NYMEX The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City ...
(CME Group) - energy and metals:
crude oil Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crude ...
,
gasoline Gasoline (; ) or petrol (; ) (see ) is a transparent, petroleum-derived flammable liquid that is used primarily as a fuel in most spark-ignited internal combustion engines (also known as petrol engines). It consists mostly of organic com ...
,
heating oil Heating oil is any petroleum product or other oil used for heating; a fuel oil. Most commonly, it refers to low viscosity grades of fuel oil used for furnaces or boilers use for home heating and in other buildings. Home heating oil is often ...
,
natural gas Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbon ...
,
coal Coal is a combustible black or brownish-black sedimentary rock, formed as rock strata called coal seams. Coal is mostly carbon with variable amounts of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen. Coal is formed when d ...
,
propane Propane () is a three-carbon alkane with the molecular formula . It is a gas at standard temperature and pressure, but compressible to a transportable liquid. A by-product of natural gas processing and petroleum refining, it is commonly used as ...
,
gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile meta ...
,
silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical ...
,
platinum Platinum is a chemical element with the symbol Pt and atomic number 78. It is a dense, malleable, ductile, highly unreactive, precious, silverish-white transition metal. Its name originates from Spanish , a diminutive of "silver". Pla ...
,
copper Copper is a chemical element with the Symbol (chemistry), symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductility, ductile metal with very high thermal conductivity, thermal and electrical conductivity. A fre ...
,
aluminum Aluminium (aluminum in American and Canadian English) is a chemical element with the symbol Al and atomic number 13. Aluminium has a density lower than those of other common metals, at approximately one third that of steel. It ha ...
and
palladium Palladium is a chemical element with the symbol Pd and atomic number 46. It is a rare and lustrous silvery-white metal discovered in 1803 by the English chemist William Hyde Wollaston. He named it after the asteroid Pallas, which was itself na ...
. * Dubai Mercantile Exchange (DME) - most notably Oman Crude, Dubai Platts, and Singapore Fuel Oil. *
Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell ...
(ICE Futures Europe) - formerly the International Petroleum Exchange trades energy including
crude oil Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crude ...
, heating oil, gas oil (diesel), refined petroleum products, electric power, coal,
natural gas Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbon ...
, and emissions * NYSE Euronext - which absorbed
Euronext Euronext N.V. (short for European New Exchange Technology) is a pan-European bourse that offers various trading and post-trade services. Traded assets include regulated equities, exchange-traded funds (ETF), warrants and certificates, bonds, ...
into which London International Financial Futures and Options Exchange or
LIFFE The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life') was a futures exchange based in London. In 2014, following a series of takeovers, LIFFE became part of Intercontinental Exchange, and was renamed IC ...
(pronounced 'LIFE') was merged. (LIFFE had taken over London Commodities Exchange ("LCE") in 1996)- softs: grains and meats. Inactive market in
Baltic Exchange The Baltic Exchange (incorporated as The Baltic Exchange Limited) is a membership organisation for the maritime industry, and freight market information provider for the trading and settlement of physical and derivative contracts. It was locate ...
shipping. Index futures include
EURIBOR The Euro Interbank Offered Rate (Euribor) is a daily reference rate, published by the European Money Markets Institute, based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro whol ...
, FTSE 100,
CAC 40 The CAC 40 (french: CAC quarante ) (''Cotation Assistée en Continu'') is a benchmark French stock market index. The index represents a capitalization-weighted measure of the 40 most significant stocks among the 100 largest market caps on the E ...
,
AEX index The AEX index, derived from Amsterdam Exchange index, is a stock market index composed of Dutch companies that trade on Euronext Amsterdam, formerly known as the ''Amsterdam Stock Exchange''. Started in 1983, the index is composed of a maximum ...
. *
Eurex Eurex Exchange is an international exchange which primarily offers trading in European based derivatives. It is the largest European futures and options market. The products traded on this exchange vary from German and Swiss debt instruments to E ...
- part of
Deutsche Börse Deutsche Börse AG () or the Deutsche Börse Group, is a German company offering marketplace organizing for the trading of shares and other securities. It is also a transaction services provider. It gives companies and investors access to ...
, also operates the Swiss Options and Financial Futures Exchange (SOFFEX) and the European Energy Exchange (EEX) * South African Futures Exchange - SAFEX * Sydney Futures Exchange *
Tokyo Commodity Exchange Tokyo Commodity Exchange, also known as TOCOM, is Japan's largest and one of Asia's most prominent commodity futures exchanges. TOCOM operates electronic markets for precious metals, oil, rubber and soft commodities. It offers futures and options ...
TOCOM * Tokyo Financial Exchange - TFX - (Euroyen Futures, OverNight CallRate Futures, SpotNext RepoRate Futures) * Osaka Exchange OSE (JGB Futures, TOPIX Futures, Nikkei Futures, RNP Futures) *
London Metal Exchange The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precio ...
- metals:
copper Copper is a chemical element with the Symbol (chemistry), symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductility, ductile metal with very high thermal conductivity, thermal and electrical conductivity. A fre ...
, aluminium,
lead Lead is a chemical element with the symbol Pb (from the Latin ) and atomic number 82. It is a heavy metal that is denser than most common materials. Lead is soft and malleable, and also has a relatively low melting point. When freshly cu ...
,
zinc Zinc is a chemical element with the symbol Zn and atomic number 30. Zinc is a slightly brittle metal at room temperature and has a shiny-greyish appearance when oxidation is removed. It is the first element in group 12 (IIB) of the periodic ta ...
,
nickel Nickel is a chemical element with symbol Ni and atomic number 28. It is a silvery-white lustrous metal with a slight golden tinge. Nickel is a hard and ductile transition metal. Pure nickel is chemically reactive but large pieces are slow ...
,
tin Tin is a chemical element with the symbol Sn (from la, stannum) and atomic number 50. Tin is a silvery-coloured metal. Tin is soft enough to be cut with little force and a bar of tin can be bent by hand with little effort. When bent, ...
and steel *
Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell ...
(ICE Futures U.S.) - formerly New York Board of Trade - softs: cocoa,
coffee Coffee is a drink prepared from roasted coffee beans. Darkly colored, bitter, and slightly acidic, coffee has a stimulating effect on humans, primarily due to its caffeine content. It is the most popular hot drink in the world. Seeds of ...
,
cotton Cotton is a soft, fluffy staple fiber that grows in a boll, or protective case, around the seeds of the cotton plants of the genus ''Gossypium'' in the mallow family Malvaceae. The fiber is almost pure cellulose, and can contain minor per ...
,
orange juice Orange juice is a liquid extract of the orange tree fruit, produced by squeezing or reaming oranges. It comes in several different varieties, including blood orange, navel oranges, valencia orange, clementine, and tangerine. As well as ...
,
sugar Sugar is the generic name for sweet-tasting, soluble carbohydrates, many of which are used in food. Simple sugars, also called monosaccharides, include glucose, fructose, and galactose. Compound sugars, also called disaccharides or double s ...
*
JFX Jakarta Futures Exchange JFX may refer to: * JavaFX, a software platform * Jones Falls Expressway, a freeway in Baltimore, Maryland * Walker County Airport Walker County Airport , also known as Bevill Field, is a public airport located five miles (8 km) northwest o ...
*
Montreal Exchange The Montreal Exchange (MX; french: Bourse de Montréal), formerly the Montreal Stock Exchange (MSE), is a derivatives exchange, located in Montreal, Quebec, Canada that trades futures contracts and options on equities, indices, currencies, ETFs, ...
(MX) (owned by the
TMX Group TMX Group Limited is a Canadian financial services company that operates equities, fixed income, derivatives, and energy markets exchanges. The company provides services encompassing listings, trading, clearing, settling and depository facilit ...
) also known in French as Bourse De Montreal: Interest Rate and Cash Derivatives: Canadian 90 Days Bankers' Acceptance Futures, Canadian
government bond A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity da ...
futures,
S&P/TSX 60 The S&P/TSX 60 Index is a stock market index of 60 large companies listed on the Toronto Stock Exchange. Maintained by the Canadian S&P Index Committee, a unit of Standard & Poor's, it exposes the investor to nine industry sectors. Combined wi ...
Index Futures, and various other Index Futures *
Korea Exchange Korea Exchange (KRX) is the sole securities exchange operator in South Korea. It is headquartered in Busan, and has an office for cash markets and market oversight in Seoul. History The Korea Exchange was created through the integration of ...
- KRX *
Singapore Exchange The Singapore Exchange Limited (SGX) is a Singaporean investment holding company that provides different services related to securities and derivatives trading and others. SGX is also a member of the World Federation of Exchanges and the Asia ...
- SGX - into which merged Singapore International Monetary Exchange (SIMEX) * ROFEX - Rosario (Argentina) Futures Exchange * NCDEX - National Commodity and Derivatives Exchange, India *
National Stock Exchange of India National Stock Exchange of India Limited (NSE) is the leading stock exchange under the ownership of various group of domestic and global financial institutions, public and privately owned entities and individuals. It is located in Mumbai, Mah ...
- National Stock Exchange, India - the largest derivates exchange in terms of number of contracts * EverMarkets Exchange (EMX) - slated for launch in late 2018 - global
currencies A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general def ...
,
equities In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
,
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
and
cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It ...
* FEX Global - Financial and Energy Exchange of Australia * Dalian Commodity Exchange (DCE) - primarily agricultural and industrial products * Shanghai Futures Exchange (SHFE) - primarily serves metal and foodstuff commodity markets * Zhengzhou Commodity Exchange (ZCE) - primarily agricultural products and petrochemicals * China Financial Futures Exchange (CFFEX) - primarily index futures and currencies

Codes

Most futures contract codes are five characters. The first two characters identify the contract type, the third character identifies the month and the last two characters identify the year. On
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset clas ...
markets, third (month) futures contract codes are: * January = F * February = G * March = H * April = J * May = K * June = M * July = N * August = Q * September = U * October = V * November = X * December = Z Example: CLX14 is a Crude Oil (CL), November (X) 2014 (14) contract.

Futures contracts users

Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying asset (which could include an intangible such as an index or interest rate) and are seeking to ''hedge out'' the risk of price changes; and speculators, who seek to make a profit by predicting market moves and opening a
derivative In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. ...
contract related to the asset "on paper", while they have no practical use for or intent to actually take or make delivery of the underlying asset. In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract.

Hedgers

Hedgers typically include producers and
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate. For example, in traditional
commodity market A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investin ...
s,
farmer A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer m ...
s often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. In modern (financial) markets, "producers" of
interest rate swaps In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations wit ...
or
equity derivative In finance, an equity derivative is a class of derivatives whose value is at least partly ''derived'' from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other ...
products will use financial futures or equity index futures to reduce or remove the risk on the swap. Those that buy or sell commodity futures need to be careful. If a company buys contracts hedging against price increases, but in fact, the market price of the commodity is substantially lower at the time of delivery, they could find themselves disastrously non-competitive (for example see: VeraSun Energy). Investment fund managers at the portfolio and the fund sponsor level can use financial asset futures to manage portfolio interest rate risk, or duration, without making cash purchases or sales using bond futures. Invest firms that receive capital calls or capital inflows in a different currency than their base currency could use currency futures to hedge the currency risk of that inflow in the future.

Speculators

Speculators typically fall into three categories: position traders,
day trader Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks ...
s, and swing traders (
swing trading Swing trading is a speculative trading strategy in financial markets where a tradable asset is held for one or more days in an effort to profit from price changes or 'swings'. A swing trading position is typically held longer than a day trading ...
), though many hybrid types and unique styles exist. With many investors pouring into the futures markets in recent years controversy has risen about whether speculators are responsible for increased volatility in commodities like oil, and experts are divided on the matter. An example that has both hedge and speculative notions involves a
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
or separately managed account whose investment objective is to track the performance of a stock index such as the S&P 500 stock index. The portfolio manager often "equitizes" unintended cash holdings or cash inflows in an easy and cost-effective manner by investing in (opening long) S&P 500 stock index futures. This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual 500 stocks just yet. This also preserves balanced diversification, maintains a higher degree of the percent of assets invested in the market and helps reduce tracking error in the performance of the fund/account. When it is economically feasible (an efficient amount of shares of every individual position within the fund or account can be purchased), the portfolio manager can close the contract and make purchases of each individual stock. The social utility of futures markets is considered to be mainly in the transfer of
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
, and increased liquidity between traders with different risk and
time preference In economics, time preference (or time discounting, delay discounting, temporal discounting, long-term orientation) is the current relative valuation placed on receiving a good or some cash at an earlier date compared with receiving it at a later ...
s, from a hedger to a speculator, for example.

Options on futures

In many cases, ''
options Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards * Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an HTTP request method ...
'' are traded on futures, sometimes called simply "futures options". A put is the option to sell a futures contract, and a
call Call or Calls may refer to: Arts, entertainment, and media Games * Call, a type of betting in poker * Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage Music and dance * Call (band), from Lahore, Pa ...
is the option to buy a futures contract. For both, the option
strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security Security is protection from, or resilie ...
is the specified futures price at which the futures is traded if the option is exercised. Futures are often used since they are delta one instruments. Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula, namely the Black model. For options on futures, where the premium is not due until unwound, the positions are commonly referred to as a fution, as they act like options, however, they settle like futures. Investors can either take on the role of option seller (or "writer") or the option buyer. Option sellers are generally seen as taking on more risk because they are contractually obligated to take the opposite futures position if the buyer of the option exercises their right to the futures position specified in the option. The price of an option is determined by supply and demand principles and consists of the option premium, or the price paid to the option seller for offering the option and taking on risk.

Futures contract regulations

All futures transactions in the United States are regulated by the
Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange A ...
(CFTC), an independent agency of the United States government. The commission has the right to hand out
fines Fines may refer to: * Fines, Andalusia, Spanish municipality *Fine (penalty) A fine or mulct (the latter synonym typically used in civil law) is a penalty of money that a court of law or other authority decides has to be paid as punishment for ...
and other punishments for an individual or company who breaks any rules. Although by
law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vari ...
the commission regulates all transactions, each exchange can have its own rule, and under contract can fine companies for different things or extend the fine that the CFTC hands out. The CFTC publishes weekly reports containing details of the open interest of market participants for each market segment that has more than 20 participants. These reports are released every Friday (including data from the previous Tuesday) and contain data on open interest split by reportable and non-reportable open interest as well as commercial and non-commercial open interest. This type of report is referred to as the ' Commitments of Traders Report', COT-Report, or simply COTR.

Definition of a futures contract

Following Björk we give a definition of a ''futures contract''. We describe a futures contract with delivery of item J at the time T: * There exists in the market a quoted price ''F(t,T)'', which is known as the futures price at time t for delivery of J at time T. * The price of entering a futures contract is equal to zero. * During any time interval , the holder receives the amount $F\left(s,T\right) - F\left(t,T\right)$. (this reflects instantaneous marking to market) * At time ''T'', the holder pays ''F(T,T)'' and is entitled to receive J. Note that ''F(T,T)'' should be the spot price of J at time T.

Futures versus forwards

A closely related contract is a
forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivat ...
. A forward is like a futures in that it specifies the exchange of goods for a specified price at a specified future date. However, a forward is not traded on an exchange and thus does not have the interim partial payments due to marking to market. While futures and
forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of derivat ...
s are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects: * Futures are exchange-traded, while forwards are traded
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid presc ...
. *: Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. * Futures are margined, while forwards are not. *: Thus futures have significantly less
credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
, and have different funding. Forwards have credit risk, but futures do not because a clearing house guarantees against default risk by taking both sides of the trade and marking to market their positions every night. Forwards are basically unregulated, while futures contracts are regulated at the central government level. The Futures Industry Association (FIA) estimates that 6.97 billion futures contracts were traded in 2007, an increase of nearly 32% over the 2006 figure.

Exchange versus OTC

Futures are always traded on an
exchange Exchange may refer to: Physics *Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States * Exchange, Indiana, an unincorporated community * ...
, whereas forwards always trad
over-the-counter
or can simply be a signed contract between two parties. Therefore: * Futures are highly standardized, being exchange-traded, whereas forwards can be unique, being over-the-counter. * In the case of physical delivery, the forward contract specifies to whom to make the delivery. The counterparty for delivery on a futures contract is chosen by the
clearing house Clearing house or Clearinghouse may refer to: Banking and finance * Clearing house (finance) * Automated clearing house * ACH Network, an electronic network for financial transactions in the U.S. * Bankers' clearing house * Cheque clearing * ...
.

Exchange for Related Position

A variety of trades have developed that involve an exchange of a futures contract for either a over-the-counter, physical commodity, or cash asset position that meets certain criteria such as scale and correspondence to the underlying commodity risk. The
Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange A ...
has fined brokers for violations of their regulations for these types of trades.CFTC. Press release. (5 June 2012). "CFTC Orders Morgan Stanley & Co. LLC to Pay $5 Million Civil Monetary Penalty for Unlawful Noncompetitive Trades" Commodity Futures Trading Commission website Retrieved 16 April 2021. Margining Futures are margined daily to the daily spot price In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after the ... of a forward with the same agreed-upon delivery price and the underlying asset (based on '' mark to market''). Forwards do not have a standard. More typical would be for the parties to agree to true up, for example, every quarter. The fact that forwards are not margined daily means that, due to movements in the price of the underlying asset, a large differential can build up between the forward's delivery price and the settlement price, and in any event, an unrealized gain (loss) can build up. Again, this differs from futures which get 'trued-up' typically daily by a comparison of the market value of the futures to the collateral securing the contract to keep it in line with the brokerage margin requirements. This true-ing up occurs by the "loss" party providing additional collateral; so if the buyer of the contract incurs a drop in value, the shortfall or variation margin would typically be shored up by the investor wiring or depositing additional cash in the brokerage account. In a forward though, the spread in exchange rates is not trued up regularly but, rather, it builds up as unrealized gain (loss) depending on which side of the trade being discussed. This means that entire unrealized gain (loss) becomes realized at the time of delivery (or as what typically occurs, the time the contract is closed prior to expiration)—assuming the parties must transact at the underlying currency's spot price to facilitate receipt/delivery. The result is that forwards have higher credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ... than futures, and that funding is charged differently. The situation for forwards, however, where no daily true-up takes place, in turn, creates credit risk for forwards, but not so much for futures. Simply put, the risk of a forward contract is that the supplier will be unable to deliver the referenced asset, or that the buyer will be unable to pay for it on the delivery date or the date at which the opening party closes the contract. The margining of futures eliminates much of this credit risk by forcing the holders to update daily to the price of an equivalent forward purchased that day. This means that there will usually be very little additional money due on the final day to settle the futures contract: only the final day's gain or loss, not the gain or loss over the life of the contract. In addition, the daily futures-settlement failure risk is borne by an exchange, rather than an individual party, further limiting credit risk in futures. Example: Consider a futures contract with a$100 (8h 21m) (8h 21m) price: Let's say that on day 50, a futures contract with a $100 (8h 21m) (8h 21m) delivery price (on the same underlying asset as the future) costs$88 (7h 20m) (7h 20m). On day 51, that futures contract costs $90 (7h 30m) (7h 30m). This means that the "mark-to-market" calculation would require the holder of one side of the futures to pay$2 (0h 10m) (0h 10m) on day 51 to track the changes of the forward price ("post \$2 (0h 10m) (0h 10m) of margin"). This money goes, via margin accounts, to the holder of the other side of the future. That is the loss party wires cash to the other party. A forward-holder, however, may pay nothing until settlement on the final day, potentially building up a large balance; this may be reflected in the mark by an allowance for credit risk. So, except for tiny effects of convexity bias (due to earning or paying interest on margin), futures and forwards with equal delivery prices result in the same total loss or gain, but holders of futures experience that loss/gain in daily increments which track the forward's daily price changes, while the forward's spot price converges to the settlement price. Thus, while under mark to market accounting, for both assets the gain or loss accrues over the holding period; for a futures this gain or loss is realized daily, while for a forward contract the gain or loss remains unrealized until expiry. With an exchange-traded future, the clearing-house interposes itself on every trade. Thus there is no risk of counterparty default. The only risk is that the clearing house defaults (e.g. become bankrupt), which is considered very unlikely.

* 1256 Contract *
Commodity Exchange Act Commodity Exchange Act (ch. 545, , enacted June 15, 1936) is a federal act enacted in 1936 by the U.S. Government, with some of its provisions amending the Grain Futures Act of 1922. The Act provides federal regulation of all commodities and fu ...
* Contract for future sale * Freight derivatives * Fuel price risk management *
Grain Futures Act The Grain Futures Act (ch. 369, , ) is a United States federal law enacted September 21, 1922 involving the regulation of trading in certain commodity futures, and causing the establishment of the Grain Futures Administration, a predecessor orga ...
*
List of finance topics The following outline is provided as an overview of and topical guide to finance: Finance – addresses the ways in which individuals and organizations raise and allocate monetary resources over time, taking into account the risks entailed ...
*
London Metal Exchange The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precio ...
* Oil-storage trade * Onion Futures Act * Perpetual futures *
Prediction market Prediction markets (also known as betting markets, information markets, decision markets, idea futures or event derivatives) are open markets where specific outcomes can be predicted using financial incentives. Essentially, they are exchange-trad ...

U.S. Futures exchanges and regulators

*
Chicago Mercantile Exchange The Chicago Mercantile Exchange (CME) (often called "the Chicago Merc", or "the Merc") is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an ...
, now part of
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset clas ...
*
Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The Commodity Exchange A ...
* National Futures Association * Kansas City Board of Trade *
New York Board of Trade The New York Board of Trade (NYBOT, renamed ICE Futures US in September, 2007), is a physical commodity futures exchange located in New York City. It is a wholly owned subsidiary of Intercontinental Exchange (ICE). History It originated in ...
now ICE *
New York Mercantile Exchange The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City ...
, now part of
CME Group CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset clas ...
* Minneapolis Grain Exchange

* * * *