Họ và tên : Phạm Ngọc Dung

Lớp : A2- Kế toán

SBD : 05
Môn : ESP II

How are futures traded?

To better understand how futures are traded, it is helpful to know what a
future is, the history behind them, and the benefits of trading them in addition to
the trading process. A 'future' is an evolved financial contract to buy or sell an
underlying commodity or product at a future time. Futures are exchanged through
authorized clearinghouses such as the Chicago Board of Trade and must be
exercised on a pre-determined date called the 'final settlement date'. The exchange
of futures contracts is regulated by the Commodity Futures Trading Commission
and requires the use of credit to the contract purchaser and has less risk than a
similar contract called a forward. Since futures contracts and prices are derived
from a product or commodity they all called derivative securities. Speculators
often buy and sell these contracts with the intent of making a profit off price
fluctuations before the delivery date, however they are also used to by farmers and
agriculturalists to hedge farm operating costs, and product sale prices such as
those associated with animal feed and grain prices.

The History of Futures: Modern day futures trading evolved out of a

forward trading system which was used in the mid 1800's as a way for farmers,
bankers and merchants to collaborate their interests financially. A forward contract
is an agreement between two or more parties to deliver a specific product on a
specific date in the future. These contracts are different from futures in that they
don't have to be traded using an exchange and the settlement of price is determined
by delivery of the product rather than the final settlement date. One of the largest
exchanges through which this process took place was the Chicago Board of Trade,
which was called The Board of Trade of the City of Chicago in the 1840's. Over
the following 30 years after 1840, futures trading which occurred through the
exchanges became more regulated and standardized allowing the futures exchange
to become more reliable and standardized. Eventually, in the 1970's a fixed market
related to, but separate from the actual underlying commodities emerged in which
financial instruments such as bonds and foreign currency could also be traded
using futures contracts.

The Trading Process: Futures are traded using 'margin' which is a financial
term for a credit account with a minimum down-payment or collateral. This
margin amount is usually between 5-15% but may go much higher. A speculator
or trader buys a futures contract through an exchange and/or a broker who works
through the exchange and does so at a fixed cost of the underlying security. If the
price of the underlying commodity or financial instrument rises during the term of
the futures contract, the contract holder can make a profit. However, if the price
falls, a loss will be incurred. During each day the buyer of the futures contract
continues to hold it, the profit or loss is recalculated. Speculators in futures trading
sometimes use a trading strategy using technical indicators and other financial
tools to aid them in their decision making. A step by step process of trading
futures is as follows:

1. Use a reliable brokerage house that works through an exchange that trades
futures
2. Choose a commodity or financial instrument to trade in such as coffee or
currency.
3. Study the different contracts, the costs and goods
4. Develop a trading strategy
5. Purchase the Futures contract and hope steps 1-4 work.
 Why Futures are Useful: Futures contracts are useful because their
derivative nature affords them the ability to represent advanced securities
transactions, products and financial instruments through a systematized trading
environment. In other words, they greatly facilitate commercial trade. Some of the
ways they do this are as follows:

1. Control price risk fluctuations by locking into a fixed price

2. Assist companies in generating capital in advance of sale.
3. Demonstrate buyer and seller predictions of future prices.
4. Assists observers with assessing economic and market conditions through
price efficiency theory.
5. They can be used across many markets including currency, bond, equity
index and commodities markets.

Who Invests in Futures and Why: Futures are traded by farmers,

agriculturalists, financial institutions and speculators. While all have a financial
interest in the contract, they may have different reasons for entering into the
contract. In the case of 'hedging' for risk , farm managers and crop farmers attempt
to bring a more stable cost and selling environment to their operations through
locking into a futures contract price they think is fair. For speculators and financial
institutions however, the purpose of the contract is different. For these latter two
participants, the intent is profit. These latter two generally do not intend to
exchange the underlying commodities but rather the money for them and
hopefully at a profit. Since the clearinghouse assumes the cost of the commodities
they take responsibility for the cost of the commodities and can re-sell the
contract.

Summary: Futures contracts are financial agreements to buy or sell an

underlying commodity at a fixed price on a settlement date. While the actual
commodity need not be exchanged, this does happen as the futures market has
evolved out of an actual commodities exchange system. The currently futures
market is currently very sophisticated, and takes place through traditional trading
and electronic exchanges that are regulated by Commodity Futures Trading
Commission (CFTC). Futures contracts have the potential to be costly especially if
the price of the commodity drops rapidly within a short time period. However, the
contract may also be profitable if exercised at a profit. Futures contracts have a
history in the commodities trade of farm products but have expanded to include
metals, energy resources and financial instruments such as currency and bonds.