Futures Market
A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Futures are exchange-traded derivatives contracts that lock in future delivery of a commodity or security at a price set today.Examples of futures markets are the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), the Cboe Options Exchange (Cboe), and the Minneapolis Grain Exchange.Originally, such trading was carried on through open outcry and the use of hand signals in trading pits, located in financial hubs such as New York, Chicago, and London. Throughout the 21st century, like most other markets, futures exchanges have become mostly electronic.
Futures Market
Definition
The futures market is an auction market where participants can buy and sell commodities and futures contracts with a future delivery date. Futures are exchange-traded derivative contracts that lock in the price of a commodity or security for future delivery based on today's price.
Origin
The origins of the futures market can be traced back to 19th century America, where farmers and merchants needed a mechanism to lock in future commodity prices to reduce the risk of price volatility. One of the earliest futures exchanges was the Chicago Board of Trade (CBoT), established in 1848. Over time, the futures market expanded to include other commodities and financial instruments and developed globally.
Categories and Characteristics
The futures market is mainly divided into commodity futures and financial futures. Commodity futures include agricultural products, energy, metals, etc., while financial futures include stock indices, interest rates, and foreign exchange. Commodity futures are characterized by their linkage to physical goods and are suitable for producers and consumers who need to hedge price risks; financial futures are primarily used for investment and risk management in financial markets.
Specific Cases
1. Farmer A grows wheat and, to avoid losses from future price drops, sells wheat futures contracts on the Chicago Board of Trade (CBoT) to lock in a future selling price. This way, even if market prices drop, he can sell his wheat at the locked-in price.
2. Investor B expects a certain stock index to rise in the future and buys futures contracts for that index on the Chicago Mercantile Exchange (CME). If the index rises as expected, he can sell at a higher price upon contract expiration and make a profit.
Common Questions
1. What are the risks of futures trading? Futures trading is highly leveraged and can result in significant losses. Investors should fully understand the market and operate cautiously.
2. Do futures contracts require physical delivery upon expiration? Not necessarily; most futures contracts are closed out through offsetting trades before expiration to avoid physical delivery.
