A future market is basically a place where people can buy and sell contracts for commodities and other assets that will be delivered at a future date. These contracts are traded on exchanges and help set a price today for something that will be delivered later.
Some well-known futures markets include the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBoT), the Cboe Options Exchange (Cboe), and the Minneapolis Grain Exchange.
Back in the day, trading was done with loud calls and hand signals in trading pits found in major cities like New York, Chicago, and London. But now, like many other markets, futures trading has mostly moved online in the 21st century.
Learn more about Future Market
To really get what a futures market is all about, you need to grasp the basics of futures contracts and the assets that are traded there.
Futures contracts are designed to help producers and suppliers of commodities manage the ups and downs of the market. They strike deals with investors who are willing to take on the risks and rewards that come with a fluctuating market.
Futures markets, or futures exchanges, are the places where these financial products are traded for delivery at a future date, with prices set when the contract is made. These markets aren’t just for agricultural products anymore; they now include buying, selling, and hedging financial products and future interest rate values.
Unlike other securities that are issued, futures contracts can be created as long as there’s an increase in open interest. The size of futures markets, which tends to grow when the stock market is uncertain, is actually larger than that of commodity markets and plays a crucial role in the financial system.
The Example
Let’s say a coffee farm sells its green coffee beans to a roaster for $4 a pound. The roaster then turns those beans into roasted coffee and sells it for $10 a pound, both making a nice profit. They want to keep their costs steady. So, if the coffee price drops below a certain point, the investor steps in to cover the difference for the farmer.
On the flip side, if coffee prices rise above a certain level, the investor gets to pocket the extra profits. For the roaster, if the cost of green coffee goes up past an agreed price, the investor pays the extra, ensuring the roaster still gets their coffee at a stable rate. But if the price of green coffee falls below that agreed price, the roaster pays the same amount, and the investor keeps the profit.