Futures Contract-Past & Present

While most people are familiar with the investment in stocks and bonds there is a certain mystique surrounding
the trading of Futures Contracts. When you buy a stock you're buying part of a company or equity in a company. When you buy a bond you become a lender or debt holder to a government or corporation. What is a future contract?

A futures contract is a legally binding contract for a specific amount of a commodity or financial instrument at a specifict time period in the future. This contract can be sold before the sellement date. Futures markets are the center of our market system economy providing the basis  for wholesale and eventually retail markets for commdities ranging from gasoline and lumber to key items in the food chain, such as meat products like cattle, pork or chicken and agricultural itiems like corn or soybeans.

Future contracts are available for more than just mainstream commodities. Future contracts are available for financial instruments including stock index futures, like the Dow, S&P, and Nasdac indices.

U.S. future contracts originated serveral hundered years ago as a mechanism through which mercants traded goods and services at some point in the future based on their expectations for crops, harvest yeilds or even as specific as the goods carried on a sailing vessel. 

Modern Origins of Future Contracts,

While there may be debate about the modern origins of future contracts, organized future exchanges existed in the 1700's in Japan at the Dojima Rice Exchange in Osaka, Japan. In Holland future contracts were used to price the probability of a sailing
vessel's successful trading voyage. The contract price started at a low price at the beginning of the vessel's trip and became
more expensive as the ship came closer to port with its shipment of trade goods.

The U.S. Future Market Origin

Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates . These (in particular the 90-day Eurodollar contract introduced in 1981) had an enormous impact on the development of the interest rate swap market.

Today, the futures markets have far outgrown their agricultural origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system , trading over 1.5 trillion U.S. dollars per day in 2005.

The recent history of these exchanges (Aug 2006) finds the Chicago Mercantile Exchange trading more than 70% of its Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over 45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in " electronic trading " as opposed to open outcry trading of Futures, Options and Derivatives.

In June 2001, ICE ( IntercontinentalExchange ) acquired the International Petroleum Exchange (IPE), now ICE Futures, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April 2005, the entire ICE portfolio of energy futures became fully electronic.

In 2006, the New York Stock Exchange teamed up with the Amsterdam-Brussels-Lisbon-Paris Exchanges "Euronext" electronic exchange to form the first trans-continental Futures and Options Exchange. These two developments as well as the sharp growth of internet Futures trading platforms developed by a number of trading companies clearly points to a race to total internet trading of Futures and Options in the coming years.

The United States followed in the early 1800s. Chicago is located at the base of the Great Lakes , close to the farmlands and cattle country of the U.S. Midwest , making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.

In 1848, the Chicago Board of Trade (CBOT - the world's first modern futures exchange) was formed. The Chicago Produce Exchange was established in 1874, renamed the Chicago Butter and Egg Board in 1898 and then reorganized into the Chicago Mercantile Exchange (CME) in 1919. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound , Canadian dollar , German mark , Japanese yen , Mexican peso , and Swiss franc .

Who Trades Futures Contracts: Hedgers and Speculators

The Future Markets of our Interest

The futures and option markets serve two major consitituencies; hedgers and speculators. Hedgers , in general, are major companies tthat actually produce the commodities, or others (like farmers) who have an inherent interest in the market.  Southwest Airlines is a good expample of a hedger in the aviation fuel market because the company must gauge the potential risk of fuel price increases into its business plan. The goal of hedgers, users of  specific goods is not to profit from futures trading, but to comver thier risk of losses and keep comapny operations profitable. Speculators , is why you and I might consider trading futures contracts-to make a profit. A speculator's job is to see where the big money is going and follow it, regardless of whether prices are going up or down.

Hedgers may actually take deliver or receive products specified in a futures contract while speculators are trying to ride the price trend of the products (tangible or financial) and cash in before the deliver date.

Future Exchanges of Interest to Traders of Financial Indices

The following future and options exchanges are those that financial futures traders use: Chicago Board of Trade, Chicago Mercantile Exchange (CME), New Your Board of Trade (NYBOT) and the New York Mercantile Exchange (NYMEX).

What financial futures these markets specialize in.

Chicago Board of Trade (CBOT) trades in interest rates, Dow Indexes and metals as well as agricultural futures.   The CBOT trades the Dow Jones Industrial mini contracts as well as e-mini contract for gold and silver.

Chicago Mercantile Exchange (CME) is the largest futues exchange in North America. It rades a wide variety of instruments, including; Stock index futures such as the S&P 500 large and e-mini contracts, the NASDAZ Large and e-mini contracts and the Russell 2000 large and e-mini contracts.

New York Mercantile Exchange (NYMEX).  The NYMEX is the hub of futures related to energy, fuels and metals.

Major Stck-Index Futures Contracts.  The S&P which trades on the (CME) is made up of the 500 largest stocks in the United States. It's a weighted index, which means that component companies that have bigger market capitalizations or market values chave a larger impact on the index movements. The S&P 500 is made up of 400 industrial companies, 40 financial companies and 20 transportation companies.

The NASDAQ-100 is made up of the 100 largest technology and biotech stocks traded on the NASDAQ system.