Introduction to Futures TradingI'll start the introduction to futures trading with a little history. The first futures exchange opened in 1848, it was the Chicago Board of Trade or CBOT. The original purpose of futures was purely to give grain and agricultural companies the option to protect themselves from adverse price movements by hedging.All contracts have a date of expiry, this date is known when the contract is bought or sold. The contract will be settled at the price of the underlying on the day of expiry, regardless of the price you bought or sold it for. Nowadays there are a large number of different contracts available including currencies, crude oil, natural gas, interest rates, gold, silver, corn, wheat, barley, lean hogs and many more. There are two main purposes for using the futures market:
1.Hedging The futures market is still used today for hedging practices, just like in the 1800's. Farmers can buy or sell contracts to protect themselves from adverse price movements. Companies can use currency futures to hedge their foreign exchange risk when doing business abroad. The individual can even protect themselves from fluctuations in gasoline prices. There really are so many possibilities.
The second main purpose is speculation. Traders can buy or sell contracts if they wish to speculate an instrument is going to move in price. Crude oil futures are extremely popular amongst big financial intuitions and small traders alike. If we had invested in the December 2008 Crude oil contract a few years ago, we would have been laughing! If only we did.
|
