Definition of Futures Instruments and Market

Futures – a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset) at a predetermined future date and price.

Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Where Futures Contracts are Traded

Futures contracts are exchange traded derivatives. The exchange’s clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement. Futures are margined daily, every day to the daily spot price of a forward with the same agreed-upon delivery price and underlying asset (based on mark to market).

Today, there are more than 75 futures and futures options exchanges worldwide including:

• CME Group (formerly CBOT and CME) — Currencies, Various Interest Rate derivatives (including US Bonds); Agricultural (Corn, Soybeans, Soy Products, Wheat, Pork, Cattle, Butter, Milk); Index (Dow Jones Industrial Average); Metals (Gold, Silver), Index (NASDAQ, S&P, etc)
• ICE Futures – the International Petroleum Exchange trades energy including crude oil, heating oil, natural gas and unleaded gas and merged with Intercontinental Exchange (ICE) to form ICE Futures.
• Liffe; and others.

Benefits of Investing in Futures Market

• see benefits for derivatives
• exchange traded = standardized + more or less liquid
• less credit risk than with forwards due to margin requirements and clearinghouse participation

Negatives of Investing in Futures Markets

• see negatives for derivatives
• daily margin requirements

Useful Links for Investors in Futures

• http://www.investopedia.com/terms/f/futures.asp
• http://en.wikipedia.org/wiki/Futures_contract
• http://www.investopedia.com/university/futures/default.asp
• http://en.wikipedia.org/wiki/Futures_exchange
• http://en.wikipedia.org/wiki/List_of_futures_exchanges
• http://www.finweb.com/investing/forward-and-futures-contracts.html
• http://www.riskglossary.com/link/future.htm