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    Futures

    FUTURES TRADING

    There are two basic categories of futures participants: hedgers and speculators.

    In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.

    Hedgers are very often businesses, or individuals, who at one point or another deal in the underlying cash commodity. Take, for instance, a major food processor who cans corn. If corn prices go up. he must pay the farmer or corn dealer more. For protection against higher corn prices, the processor can "hedge" his risk exposure by buying enough corn futures contracts to cover the amount of corn he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if corn prices rise enough to offset cash corn losses.

    Speculators are the second major group of futures players. These participants include independent floor traders and investors. Independent floor traders, also called "locals", trade for their own accounts. Floor brokers handle trades for their personal clients or brokerage firms.

    For speculators, futures have important advantages over other investments:

    • Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract (usually 10% 15% and sometimes less) as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. (Compare this to the stock investor who generally has to put up at least 50% of the value of his stocks.) Moreover the commodity futures investor is not charged interest on the difference between the margin and the full contract value.

    • In general, futures are harder to trade on inside information. After all, who can have the inside scoop on the weather or the Chairman of the Federal Reserve's next proclamation on the money supply? The open outcry method of trading as opposed to a specialist system insures a very public, fair and efficient market.

    • Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.

    • Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade's execution.

    • Each futures exchange has a clearing association which operates in conjunction with the exchange in a manner similar to a bank clearing house.

    • Membership in the clearing association is composed exclusively of well capitalised members of the exchange and corporations or partnerships one of whose officials must be an exchange member Exchange members who do not join the clearing association must clear their trades through a member of the association.

    • Every clearing house member must put up fixed original margins and maintain them with the clearing house in the event of adverse price fluctuations. In such instances, the clearing house may call for additional margins throughout the day without waiting for routine end of day settlement.

    • It is worth noting here that parties to a trade who disagree about the information they exchanged in the pit (such as the price, number of contracts or month of the trade) must settle their differences and clear the trade before they are allowed to return to the floor the next morning. Disputes rarely arise, but if they do, exchanges have steps to follow in helping to resolve them.

    • Futures charts, quote prices, news and commitment of traders reports for popular currency futures, including U.S. Dollar Index, Australian Dollar, Canadian Dollar, British Pound, Euro, Japanese Yen, Mexican Peso, New Zealand Dollar, and Swiss Franc. Intraday commodity / futures charts are updated continuously during market hours, other futures charts are updated according to chart period.

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