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Encyclopedia > Futures markets

A futures exchange, is a corporation or organization which provides a marketplace in which to trade derivatives such as futures contracts and options. Known also as Commodities exchanges, contracts transact daily in a variety of standardized products such as equities, bonds, short-term interest rates, grains, softs and currencies. Image File history File links Broom_icon. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ... A commodities exchange is an exchange where various commodities and derivatives products are traded. ...

Contents

Standardization

The contracts traded on futures exchanges are always standardized. In principle, the parameters to define a contract are endless (see for instance in futures contract). To make sure liquidity is high, there is only a limited number of standardized contracts. In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ...


Nature of contracts

Exchange traded contracts are not issued like securities, but they are "created" when one party buys (goes long) a contract from another party (who goes short). In the beginning there are no contracts, so the number of contracts that clients are long must equal the number of contracts that clients are short. This always goes through the exchange, which means that the exchange is the counterparty for all trades. However, the exchange does not take any net positions. In this way clients do not know with whom they have ultimately traded. Compare this with securities, in which an issuer issues the security. After that, it is a legal entity that is traded independently of the issuer. Even if the issuer buys back some securities, they still exist. Only if they are legally cancelled can they disappear.


Derivatives Clearing

There is usually a division of responsibility between provision of trading facility and settlement of those trades. While derivative exchanges like the CBOE and LIFFE take responsibility for providing efficient, transparent and orderly trading environments, settlement of the resulting trades are usually handled by Clearing Corporations, also known as Clearing Houses, that serve as central counterparties to trades done in the respective exchanges. For instance, the Options Clearing Corporation and the London Clearing House respectively are the clearing corporations for CBOE and LIFFE. An well known exception to this is the case of Chicago Mercantile Exchange, which clears trades by itself. The Chicago Board Options Exchange (CBOE) is one of the worlds largest options exchanges with an annual trade of over 15 billion shares of stock options in some 1200 companies. ... ... The Options Clearing Corporation is a not-for-profit organization that is used to clear securities option contracts, as well as futures contracts. ... President George W. Bush at the CME (March 6, 2001). ...


Central Counterparty

Derivative contracts are leveraged positions whose value is volatile. They are usually more volatile that their underlying<-- missing text --->. This can lead to situations where one party to a trade loses a big sum of money and is unable to honor its settlement obligation. In a safe trading environment, the parties to a trade need to be assured that their counterparty will honor the trade, no matter how the market has moved. This requirement can lead to messy arrangements like credit assessment, setting of trading limits and so on for each counterparty, and take away most of the advantages of a centralised trading facility. To prevent this, Clearing corporations interpose themselves as counterparties to every trade and extend guarantee that the trade will be settled as originally intended. This action is called Novation. As a result, trading firms take no risk on the actual counterparty to the trade, but on the clearing corporation. The clearing corporation is able to take on this risk by adopting an efficient margining process. Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. ...


Margin and Mark-to-Market

Clearing houses charge 2 types of margins - the Initial Margin and the Mark-To-Market margin (also referred to as Variation Margin).


The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm. In the simplest case, this is the dollar figure that answers a question of this nature: What is the likely loss that this firm may incur on its portfolio with a 99% confidence and over a period of 2 days? The clause 'with a 99% confidence' and 'over a period 2 days' is to be interpreted as that number such that the actual portfolio loss over 2 days is expected to exceed the number only 1% of the time. Several popular methods are used to compute initial margins. They include the CME-owned SPAN (a grid simulation method used by the CME and about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the OCC), TIMS (earlier used by the OCC, and still being used by a few other exchanges like the Bursa Malaysia. Monte Carlo methods are algorithms for solving various kinds of computational problems by using random numbers (or more often pseudo-random numbers), as opposed to deterministic algorithms. ... The Bursa Malaysia, MYX previously known as Kuala Lumpur Stock Exchange (KLSE, Bursa Saham Kuala Lumpur in Malay) dates back to 1930 when the Singapore Stockbrokers Association was set up as a formal organisation dealing in securities in Malaya. ...


The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that has already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position. If the resulting amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm (the case with most clearing houses) or kept in reserve depending on local practice. In either case, the positions are 'marked-to-market' by setting their new cost to the market value used in computing this difference. The positions held by the clients of the exchange are marked-to-market daily and the MTM difference computation for the next day would use the new cost figure in its calculation. In economics, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument, or on a fair valuation based on the current market prices of similar instruments. ... In economics, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument, or on a fair valuation based on the current market prices of similar instruments. ...


Clients hold a margin account with the exchange, and every day the swings in the value of their positions is added to or deducted from their margin account. If the margin account gets too low, they have to replenish it. In this way it is highly unlikely that the client will not be able to fulfill his obligations arising from the contracts. As the clearing house is the counterparty to all their trades, they only have to have one margin account. This is in contrast with OTC derivatives, where issues such as margin accounts have to be negotiated with all counterparties.


Regulators

Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency:

The Australian Securities & Investments Commission (ASIC) is an independent Australian government body that acts as Australias corporate regulator. ... The China Securities Regulatory Commission (zh: 中国证券监督管理委员会) is an institution of the State Council of the Peoples Republic of China (PRC). ... Securities and Exchange Board of India (SEBI) is a board (corporate body) appointed by the Government of India in 1992 with its head office at Mumbai. ... The Monetary Authority of Singapore is Singapores central bank. ... The Financial Services Authority (FSA) is an independent non-departmental public body and quasi-judicial body that regulates the financial services industry in the United Kingdom. ... The Commodity Futures Trading Commission (CFTC) is an independent agency of the United States Government, created by Congress in 1974. ...

History of futures exchanges

Though the origins of futures trading can be supposedly traced to Ancient Greek or Phoenician times, the history of modern futures trading begins in Chicago, United States in the early 1800s. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest, making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge. Forward contracts were standard at the time, however, most forward contracts weren't honored by both the buyer and the seller. For instance, if the buyer of a corn forward contract had an agreement to buy corn and at delivery time the price of corn was dramatically higher then when the two originally contracted the buyer backed out. Vice versa is also true. In addition, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller. Note: This article contains special characters. ... Phoenician sarcophagus found in Cadiz, Spain; now in Archaeological Museum of Cádiz. ... Nickname: The Windy City, The Second City, Chi Town, City of the Big Shoulders, The 312, The City that Works Motto: Urbs In Horto (Latin: City in a Garden), I Will Location in Chicagoland and Illinois Coordinates: Country United States State Illinois County Cook & DuPage Incorporated March 4, 1837  - Mayor... Beginning of the Napoleonic Wars (1805 - 1815). ... Nickname: The Windy City, The Second City, Chi Town, City of the Big Shoulders, The 312, The City that Works Motto: Urbs In Horto (Latin: City in a Garden), I Will Location in Chicagoland and Illinois Coordinates: Country United States State Illinois County Cook & DuPage Incorporated March 4, 1837  - Mayor... The Great Lakes from space The Great Lakes are a group of five large lakes in North America on or near the Canada-United States border. ... The Midwest is a common name for a region of the United States of America. ... In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. ... Look up corn in Wiktionary, the free dictionary. ...


In 1848, the Chicago Board of Trade (CBOT), the world's first futures exchange, was formed. Trading was originally in forward contracts; the first contract (on corn) being written on March 13, 1851. In 1865, standardized futures contracts were introduced. Year 1848 (MDCCCXLVIII) was a leap year starting on Saturday (link will display the full calendar) of the Gregorian Calendar (or a leap year starting on Monday of the 12-day slower Julian calendar). ... The Chicago Board of Trade (CBOT) NYSE: BOT, established in 1848, is the worlds oldest futures and options exchange. ... It has been suggested that forward price be merged into this article or section. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ...


The Chicago Produce Exchange was established in 1874, renamed in 1898 the Chicago Mercantile Exchange (CME). In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc. Year 1874 (MDCCCLXXIV) was a common year starting on Thursday (link with display the full calendar) of the Gregorian calendar (or a common year starting on Saturday of the 12-day slower Julian calendar). ... 1898 (MDCCCXCVIII) was a common year starting on Saturday (see link for calendar) of the Gregorian calendar (or a common year starting on Monday of the 12-day-slower Julian calendar). ... President George W. Bush at the CME (March 6, 2001). ... 1972 (MCMLXXII) was a leap year starting on Saturday. ... The International Monetary Market (IMM), largely the creation of Leo Melamed, is part of the Chicago Mercantile Exchange (CME), the largest futures exchange in the United States and the second largest exchange in the world for the trading of futures and options on futures. ... For details of notes and coins, see British coinage and British banknotes. ... ISO 4217 Code CAD User(s) Canada Inflation 2. ... ISO 4217 Code DEM User(s) Germany, Montenegro, Kosovo ERM Since 13 March 1979 Fixed rate since 31 December 1998 Replaced by €, non cash 1 January 1999 Replaced by €, cash 1 January 2002 € = 1. ... ISO 4217 Code JPY User(s) Japan Inflation -0. ... ISO 4217 Code MXN User(s) Mexico Inflation 3. ... ISO 4217 Code CHF User(s) Switzerland, Liechtenstein, Campione dItalia Inflation 1. ...


Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates. These (in particular the 90-day Eurodollar contract introduced in 1981) had an enormous impact on the development of the interest rate swap market. The 1970s decade refers to the years from 1970 to 1979, inclusive. ... A financial future is a futures contract on a short term interest rate (STIR). ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... In finance, the prefix euro as in eurodollars or euroyen refer to currency deposited outside the country of their origin. ... In the field of derivatives, a popular form of swap is the interest rate swap, in which one party exchanges a stream of interest for another partys stream. ...


Today, the futures markets have far outgrown their agricultural origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over 1.5 trillion U.S. dollars per day in 2005. The New York Mercantile Exchange**** NOTE the AMENX is FAKE, created by york-commodities to scam your money, if you send money you will never see it again**** You have been warned. ... It has been suggested that this article or section be merged into Hedge (finance). ... The Global Financial System refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. ...


The recent history of these exchanges (Aug 2006) finds the Chicago Exchange trading more than 70% of its Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over 45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic trading" as opposed to open outcry trading of Futures, Options and Derivatives. And that is only one of the worlds current Futures Exchanges, albeit the largest one at this writing. Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller through electronic media to create a virtual market place. ...


In June of 2001, ICE acquired the International Petroleum Exchange (IPE), now ICE Futures, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE portfolio of energy futures became fully electronic.


In 2006, the New York Stock Exchange teamed up with the London Exchanges "Euronext" electronic exchange to form the first trans-continental Futures and Options Exchange. These two developments as well as the sharp growth of internet Futures trading platforms developed by a number of trading companies clearly points to a race to total internet trading of Futures and Options in the coming years.


See also

// Montreal Exchange Winnipeg Commodity Exchange Chicago Board Options Exchange (CBOE) Chicago Board of Trade (CBOT) Chicago Butter and Egg Board, precursor to the Chicago Mercantile Exchange (CME) Chicago Climate Exchange Chicago Mercantile Exchange (CME) Commodity Exchange (COMEX), now a division of NYMEX Intercontinental Exchange (ICE) International Monetary Market (IMM), part... This article or section is missing references or citation of sources. ... The Currency Market or Foreign Exchange Market is one of the largest markets in the world. ... A stock exchange is an organization of which the members are stock brokers. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and derivatives. ...

Futures Exchanges

Financial markets

Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
Junk Bond
The Chicago Board of Trade (CBOT) NYSE: BOT, established in 1848, is the worlds oldest futures and options exchange. ... Euronext N.V. is a pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. ... President George W. Bush at the CME (March 6, 2001). ... Intercontinental Exchange or ICE is an Atlanta-based energy market. ... The New York Mercantile Exchange**** NOTE the AMENX is FAKE, created by york-commodities to scam your money, if you send money you will never see it again**** You have been warned. ... The New York Board of Trade (NYBOT) is a physical commodity futures exchange located in New York, New York. ... The National Stock Exchange of India (NSE), is one of the largest and most advanced stock markets in India. ... In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... Fixed income refers to any type of investment that yields a regular (fixed) payment. ... A Corporate bond is a bond issued by a corporation, as the name suggests. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... High yield debt (non-investment grade or junk bond) is a business term referring to a corporate debt instrument, usually a bond, that has a higher yield (compared to investment grade debt) because of a high perceived credit risk (default risk). ...

Stock Market
Stock
Preferred stock
Common stock
Stock exchange
The New York Stock Exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... It has been suggested that shareholder be merged into this article or section. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign Exchange Market
Retail forex
Forex Scam
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... Template:The Retail Forex Market The Retail Forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the much larger Foreign Exchange market. ... A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to profit by trading in the foreign exchange market. ...

Derivative market
Credit Derivative
Hybrid security
Options
Futures
Forwards
Swaps
A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... For other uses, see Option An option contract is an agreement in which the buyer (holder) has the right (but not the obligation) to exercise by buying or selling an asset at a set price (strike price) on (European style option) or before (American style option) a future date (the... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... It has been suggested that forward price be merged into this article or section. ... In finance a swap is a derivative, where two counterparties exchange one stream of cash flows against another stream. ...

Other Markets
Commodities market
OTC market
Real estate market
Spot market
Chicago Board of Trade Commodity market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Valuation and Theories
Market Valuation
Financial market efficiency
Central to the world of finance is the practice of valuation, in monetary terms, of the Financial markets, or Finacial market valuation. ... Financial market efficiency is an important topic in the world of Finance. ...


Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect efficient markets. ... There are two basic financial market participant catagories, Investor vs. ... Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... Banker redirects here; see wiktionary:banker for more meanings. ... Financial supervision is government supervision of financial institutions by regulators. ...

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  Results from FactBites:
 
Futures and Options Markets, by Gregory J. Millman: The Concise Encyclopedia of Economics: Library of Economics and ... (2246 words)
Futures are standardized contracts that commit parties to buy or sell goods of a specific quality at a specific price, for delivery at a specific point in the future.
Futures have long been associated with agricultural commodities, especially grain and pork bellies, but they are now more likely to be used by bankers, airlines, and computer makers than by farmers.
As a rule of thumb, about half of the participants in the futures markets are hedgers who come to market to remove or reduce their risk.
  More results at FactBites »

 
 

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