Futures markets and hedging

Futures markets have been in existence in one form or another for centuries. The modern futures exchange dates to the mid-1800s, with the founding of the Chicago Board of Trade. Despite their long history, however, the role and impact of futures markets on both commodity producers and consumers continues to be controversial, and their use the subject of regular study. This chapter reviews the recent history of futures markets and describes their intended roles in both price discovery and risk management. It then covers of some of the research directed at evaluating futures market performance and use. While many of the issues associated with futures trading have not changed since the 1800s, the techniques applied to the questions have become increasingly sophisticated. The introduction of time series techniques in studying market performance, for example, gave rise to a whole new body of research focused on questions that were addressed decades earlier using structural models. The chapter closes with some suggestions for new research topics related to understanding futures markets, particularly in their use in price risk management programs. JEL Classifications: G11, G13, G14, Q11, Q14