FUTURE

A Future contract is contract to buy or sell a specific quantity of a commodity or financial instrument for delivery in a specific time in the future, made under terms and conditions established by a federally regulated futures exchange market. The future contract items include trading of currencies, financial indices (such as Dow Jones), commodities (such as Sugar & Coffee), precious metals (such as Gold & Silver) and energy futures (such as Crude Oil & Natural Gas). The largest futures exchange in the U.S. is the Chicago Mercantile Exchange, which was formed in the late 1890s when the only futures contracts offered were for agricultural products. The 1970s saw the emergence of currency futures in major currencies, plus some other types of futures. Today’s futures exchanges are significantly larger, with hedging of financial instruments via futures comprising the majority of the futures market activity. Futures exchanges play an important role in the operation of the global financial system. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of sugar could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of sugar by going long or short using futures. The main difference between “options” and “futures” is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract must fulfill the terms of this contract at the time of expiration. In real life however, the actual delivery rate of the goods specified in futures contracts is extremely low. This is because hedging or speculating on the prices of the contracts can be done without actually holding the contract until expiry and delivering the goods