Futures Contracts and Futures Markets

Abstract This is the first of two chapters dealing with futures contracts, and it concentrates on the defining characteristics of a futures contract, on ways in which it can be settled, on types of commodities and financial instruments in which futures trading is likely to be successful, and on measures of the importance of futures markets; the discussion is with respect to the USA. The exchanges on which futures contracts are traded are also explored: the history of organized markets, the role of the clearinghouses, the form of quotations, and the main market participants – hedgers, speculators, arbitrageurs and floor traders. The following chapter examines some of the theory and empirical evidence on the pricing of futures contracts, paralleling the discussion of stock and options prices in earlier chapters; it should be noted that some of the finer points in Ch. 9 may not be fully clear without the analysis of futures prices presented in Chapter 10. The first section of Ch. 9 looks at forward contracts, and the rest of the chapter is devoted to futures contracts (which are a highly standardized forwards contract) per se – with sections on the origin of futures trading, basic elements of futures contracts and the organization of futures markets. An appendix discusses the Euromarkets and the swap market.