Futures 101
A futures contract is a commitment to make or take delivery of a specific quantity and quality of a given commodity at a predetermined place and time in the future. All terms of the contract are standardized and established in advance except for the price which is determined by an open auction in a pit on the trading floor of a regulated commodity exchange or through an exchange’s electronic trading system.
Futures Contracts
All futures contracts are ultimately settled either through liquidation by offsetting purchases or sales or by delivery of the actual physical commodity. An offsetting transaction is the most common used method to settle a futures contract.
Market Participants
Futures market participants are either hedgers or speculators. Hedgers are people who need protection from price volatility such as farmers, merchandisers, exporters and importers. Speculators are part of the general public attracted by the opportunity to realize profits in anticipating the direction and timing of price changes.
Futures Classification
The following is a list of major commodity classification:
· Energy – Crude oil, natural gas, coal, solar and wind power, electricity and ethanol.
· Grains and Oilseeds – Corn, wheat, soybeans, sugar and cotton.
· Livestock – Live cattle, feeder cattle, lean hogs, pork bellies and lumber.
· Precious Metals – Gold, silver, platinum, aluminum, copper, palladium, nickel and zinc.
· Tropical Products – Orange juice, coffee, cocoa and rice.
· Financial futures – Contracts on stocks, indices and currencies.
Major Exchanges
The three major futures exchanges are:
· Chicago Board of Trade (CBOT)
· Chicago Mercantile Exchange (CME)
· New York Mercantile Exchange (NYMEX).
Futures Merchants, Advisors and Operators
· The Commodity Trading Advisor (CTA) managers traders’ account and maintains detailed records. CTA acts as facilitator and advisor to those wanting to trade individually in futures contracts. Disclosure reports have to be filed with the National Futures Association (NFA).
· Futures Commission Merchant (FCM) is licensed to accept and to solicit orders for futures trades. The FCM is required to file monthly financial reports with the Commodity Futures Trading Commission (CFTC).
· Commodity Pool Operator (CPO) acts like mutual funds and operates trading pool on behalf of individuals and corporations. Disclosures and annual financial statements are filed with the NFA.
Futures Quotation
Futures contract trade under a two-part alphabetical system. First alphabet refers to the type of futures contract while the second refers to the delivery month.
Delivery months used in futures contracts are as follow:
· January – F
· February – G
· March – H
· April – J
· May – K
· June – M
· July – N
· August – Q
· September - U
· October – V
· November – X
· December – Z