The ABC's of Futures

A Bit of Futures History
Futures are essential to worldwide commerce and trade. Futures-style trading has been around for centuries bringing buyers and sellers together to facilitate business transactions. By helping to solve potential price risk and credit problems, futures serve to increase market reliability, liquidity and efficiency, while reducing volatility.

What is a Futures Contract?
A futures contract is a standardized, exchange-traded, legally binding agreement to buy or sell a specific type, quantity or grade of a commodity or financial instrument at an agreed upon time and place in the future.

Futures contracts are highly regulated by market exchanges-New York Board of Trade, New York Mercantile Exchange, Chicago Mercantile Exchange, Chicago Board of Trade, London Metals Exchange, Eurex Frankfurt, Singapore Exchange-that set the contract specifications for cash and futures contracts. The value of a futures contract is tied to the underlying asset.

Contract Contract Size Price Value
T-Bonds $100,000, 30-Year U.S. Gov't debt 1-15 $115,000
Crude Oil 1000 Barrels at the contract price 30.00 $30,000
Wheat 5,000 Bushels at the contract price 4.00 $20,000
Silver 5,000 Troy Oz. at the contract price 4.75 $23,750
Euro 125,000 Euros at the contract price 110.00 $137,500
S&P 500 $250 times the index price 900.00 $225,000
  Who Trades Futures?
Similar to stock and bond trading by institutions and individuals, futures are traded by manufacturers, agricultural, industrial and commercial interests and banks and financial institutions. Futures markets also welcome individual investors as sources of added liquidity and shareholders in risk. However, unlike huge commercial interests that take delivery on contracts, individuals always offset their futures positions prior to contract expiration in order to avoid delivery.

What is the role of futures in asset diversification? Learn more about asset allocation >>