futures market

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Futures market

A market where contracts for future delivery of a commodity or a financial instrument are bought or sold.

Futures Market

The supply and demand for the trading of futures contracts. A futures contract is an agreement to buy and sell an asset at a certain date at a certain price. That is, Investor A may make a contract with Farmer B in which A agrees to buy so many bushels of B's corn at $15 per bushel. This contract must be honored whether the price of corn goes to $1 or $100 per bushel. Futures contracts can help reduce volatility in certain markets, but they contain the risks inherent to all speculative investing. These contracts may be traded on the secondary market, creating the futures market. The investor holding the contract at its end must take delivery of the underlying asset. Trading on the futures market often occurs on a futures exchange, such as the Merc.

futures market

A market in which futures contracts are bought and sold. The various organized futures exchanges specialize in certain types of contracts. For example, corn, oats, soybeans, and wheat are traded on the Chicago Board of Trade, while the Commodity Exchange in New York handles trades in copper, gold, and silver. Other futures markets include the Chicago Mercantile Exchange, the Coffee, Sugar and Cocoa Exchange, the International Monetary Market, the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange, the New York Futures Exchange, and the New York Mercantile Exchange.

futures market

see FORWARD MARKET.

futures market

or

forward exchange market

a market that provides for the buying and selling of COMMODITIES (rubber, tin, etc.) and FOREIGN CURRENCIES for delivery at some future point in time, as opposed to a SPOT MARKET, which provides for immediate delivery. Forward positions are taken by traders in a particular financial asset or commodity, the price of which can fluctuate greatly over time, in order to minimize the risk and uncertainty surrounding their business dealings in the immediate future (i.e. ‘hedge’ against adverse price movements), and by dealers and speculators (see SPECULATION) hoping to earn windfall profits from correctly anticipating price movements.

Traders seek to minimize uncertainty about future prices by buying or selling futures, particularly OPTIONS, i.e. contracts that promise to buy or sell a commodity or financial asset at a price agreed upon now for delivery at some later point in time, usually within a three-month period. For example, a producer of chocolate could contract to buy a given amount of cocoa at today's price plus a percentage risk premium for delivery in two months’ time. Even if the price of cocoa were to go up markedly, the manufacturer knows that he is still able to buy at the (lower) contract price and is thus able to plan his raw material outlays accordingly. Similarly, the growers of cocoa can contract to sell the commodity at an agreed price now for delivery in the near future in order to cover themselves against adverse price changes. Unlike the spot market, where commodities are traded in the physical sense, in the futures market it is only these contracts that are bought and sold.

Between the original buyers and producers, using futures as a hedge to minimize risk, stand the various dealers and speculators who buy or sell the paper contracts to such items according to their view of probable price movements in the hope of securing windfall profits.

Forward prices reflect anticipated future demand and supply conditions for a commodity, financial security or foreign currency being traded.

Specifically, the forward prices will be based partially on current spot prices but will also take into account interest rate and inflation rate trends. The difference between the current spot price of a commodity and the forward price constitutes the ‘forward margin’. The forward margin can be at either a discount or a premium to the spot price. Forward margins for a particular commodity, such as cocoa, in different commodity markets in London, Chicago, etc., tend to be similar as a result of the buying and selling of futures contracts between these markets (ARBITRAGE).

The LONDON INTERNATIONAL FINANCIAL FUTURES MARKET (LIFFE) constitutes the largest European Union centre for forward dealings in securities and commodities. The forward markets in the UK are regulated by the Securities Association in accordance with various standards of good practice laid down under the FINANCIAL SERVICES ACT 1986. See DERIVATIVE, COMMODITY MARKET, FOREIGN EXCHANGE MARKET, STOCK EXCHANGE, COVERED INTEREST ARBITRAGE, EXCHANGE RATE EXPOSURE.

References in periodicals archive ?
This allows us to decide about the Tunisian forward exchange market efficiency.
In April 1998, turnover in the forward exchange market was USD 111 363 million, or USD 5 861 million per banking day (see Table 2).
Table 3 Turnover in the Norwegian forward exchange market by maturity in April 1995 and April 1998.
South Korea, the Philippines, and Taiwan, restrict foreign access to their currency and on-shore money markets, making it very difficult--if not impossible--for foreign firms or international investors to hedge in local forward exchange markets, even when such markets exist.
However, the existence of forward exchange market allows non-spot traders to enter into forward contracts in period t-1 (the time of making commitments) and to deliver (or receive delivery of) specified units of foreign currency in period t (the time of actual delivery), in exchange for the domestic currency at a stipulated forward exchange rate.
Equation (11) is the forward exchange market clearing condition -- the excess hedging supply of forward exchange, [T.
To facilitate the exposition we analyze the behavior of a small open economy, first assuming that no forward exchange markets are available; later we introduce a forward market but we require the payment of a fee (commission) for participation in forward transactions.

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