An Introduction To Futures Contracts

An Introduction To Futures Contracts

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Today futures trading is the most common type of derivative trading, done through centralized exchanges all over the world. It is the trading of futures contracts, which gives the holder the ability to purchase the underlying product for a set price after a definite time period. The major purpose of creating features contract is to overcome the price fall in the actual product delivery time by ensuring the present day price (or around that). Today there are mainly two broad types of futures contracts available for trading as commodity future and financial future contracts.

The early type of futures contracts came in to being in Japan and Holland in 18th century for agricultural commodities like wheat and rice. The first organized type of futures contracts and futures trading started in early 1840s in Chicago, US. Futures contracts begin to trade through centralized futures trading markets in 1948, when the Board of Trade of the City of Chicago (later became the Chicago Mercantile Exchange, CME) established. The market allowed traders to trade products in both ways, by spot contracts demanding instant product delivery and futures contracts demanding delivery in future.

Until the early 21st century, the common products available through futures contracts were some meat, live stocks and common agricultural commodities like rice, wheat, oats etc. Later more agricultural commodities like soybeans, metals like gold and silver, and energy commodities like oils and gases also became available through futures contracts. With the recognition that stocks and other securities can be used as futures, stock futures and stock index futures came in to existence. The worldwide ending of currency gold standards & be introduction of free floating currencies in 1971, CME had introduced currency futures or money futures contracts, which later became the most widely traded futures type. The electronic futures contracts trading started in 1987, which made these contracts available to all those want to trade.

A standard futures contract is a unalterable set of specifications, which clearly tells about the type and quantity of underlying product, proposed delivery time and the predetermined price of the product. It is guaranteed by clearing firms and is margined for minimizing counterparty credit risks. Futures contracts are similar to forward contracts, but the differences include forward contracts are traded over-the-counter that requires a broker-dealer interaction and often bargaining, and are not so standardized. Futures contracts are traded by open outcry of screen in public domains.

There are many, around 80, centralized markets available for trading futures contracts; most of them appreciate online trading. Different markets specialize in different products, some financial futures, some stock or index based futures and others commodity futures. Similarly brokers providing access to futures market specializes in different markets. The major worldwide futures trading markets include CME, CBOT (Chicago Board of Trade), Euronext, ICE Futures, Intrade, London Commodity Exchange, London Metal Exchange, NYMEX (New York Mercantile Exchange), TOCOM (Tokyo Commodity Exchange), NYBOT (New York Board of Trade), Sydney Futures Exchange, etc. The main regulatory body governing futures contracts trading in US is CFTC (Commodity Futures Trading Commission).

About the Author:
Praveen Ortec works for NobleTrading.com, an online day trading broker offering direct access online futures trading on 3 different futures trading systems.



Article Originally Published On: http://www.articlesnatch.com


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