Commodities and Futures Guide.com

Our team has come up with an article on the currency futures where it discusses about the know hows of the currency market futures their delivery, contract size ,average volume traded on a daily basis as well as the maturity.Moreover concepta like how the investors use currency as a tool to hedge their exposure as well as speculate the future position and invole in trades.

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Currency futures is done on the foreign exchange market/currency/forex/or FX. FX transactions typically involve one party (usually a bank or other official institution) purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world. The trading takes place between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing and the average daily turnover is around $3.98 trillion US.

Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates- agreed upon price at an agreed upon future date. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. Typically, one of the currencies is the US dollar.

Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in the currency of the underlying contract. Investors can close out the contract at any time prior to the contract’s delivery date and most contracts are closed out before the actual delivery date.

Investors use these futures contracts to hedge against foreign exchange risk. If an investor will receive a cash flow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cash flow. Basically, an investor can lock in the value of the transaction at today’s exchange rates.

Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. In this manner, an investor can speculate on a specific currency becoming weaker or stronger compared to the US dollar at a future date.

Currency futures are not to be confused with currency markets. Futures based upon currencies are similar to the actual currency markets, but there are some significant differences. For example, currency futures are traded via exchanges, such as the CME (Chicago Mercantile Exchange), but the currency markets are traded via currency brokers, and are therefore not as controlled as the currency futures.

While researching about the commodity trading we came across some basic conditions and intresting facts about commodities.

Commodity trading as we know it began with farmers (sellers) and dealers (buyers) beginning to commit to future exchanges of grain for cash in the 1800’s. To be traded as a commodity, the item must meet three basic conditions.

a)It has to be standardized and, for agricultural and industrial commodities, must be in a basic, raw, unprocessed state.

b) It must have an adequate shelf life due the fact that a futures contract is by definition, deferred.

c) There must be enough fluctuation to create uncertainty; this means both risk and potential profit for the buyer and seller.

Some interesting facts about commodities are:

The Chicago Butter and Egg Board was founded in 1898 and evolved into the Chicago Mercantile Exchange in 1919. It is now 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. (Chicago Mercantile Exchange)

It is estimated that typically four percent of what is actually traded, or less, is actually delivered. A contract may be bought and sold many times before the delivery date as businesses attempt to manage their risk. This is what accounts for the large volume traded, though relatively little is delivered, since the basic purpose of a futures contract is to provide price-change protection. (Chicago Board of Trade)

The dollar value of futures contracts traded currently exceeds several fold the dollar value of common stocks traded on all U.S. stock exchanges.(National Futures Association)

On the New York Mercantile Exchange, about 1,000 contracts are bought and sold each minute. (New York Mercantile Exchange)

Most exchange trading floors are divided into pits/rings where traders stand facing one another. These are more or less shallow octagonal areas with raised steps around the edge. Each pit is designated for trading one or more futures contracts.(Chicago Mercantile Exchange)

Commodity exchanges have been established around the world. A partial listing includes Argentina, Australia, Austria, Brazil, Bulgaria, Hungary, Canada, China, India, Japan, Korea, New Zealand, Singapore, South Africa, Turkmenistan, the United Kingdom, and of course the United States. (Wall Street Executive Library (Rutgers University))

The Clearing House is responsible for clearing trades and for the day-to-day settlement. This is called “marked-to-market,” and means that your account is credited or debited based on that session’s gains or losses. As prices move for or against your position, funds flow into and out of your trading account. (Chicago Mercantile Exchange)

Introduced in 1956, the New York Mercantile Exchange’s platinum contract is the longest continuously traded precious metals contract in the world’s marketplace. (New York Mercantile Exchange)

FUTURES CONTRACTS

Futures: special forms of forward contracts that are designed to reduce the disadvantages associated with forward agreements. Indeed, they are Forwards whose terms have been STANDARDIZED to that they can be traded in a public marketplace. Less flexible, but more liquid.

• Usually traded on FUTURES exchanges, who establish terms of standardization, rules or Pit trading, daily price limit, trading hours, and settlement price methods.

• Regulated by the CFTC (Commodities Futures Trading Commission).

• Brokers: Account Executives who take orders from customers and relay them to the floor; and Floor Brokers who operate on the floor and execute orders for others and for themselves.

• CLEARINGHOUSE: interposed between each side and guarantees the contract.

• POSTING MARGIN, MARKING TO MARKET
• Capital Gains are based upon the NET DAILY SETTLEMENT gains or losses that occur in a tax period, rather than upon the net gains or losses that result form contracts that are closed out during a tax period.
• FUTURES is a ZERO sum GAME

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Know How’s of Future Contracts

Futures Contract

A futures contract is a legally binding standardized agreement between two parties to buy or sell a predetermined amount of a commodity, such as corn, during a specified month in the future (the delivery month) at a price (the future price) which is determined at the time the contract is established

A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option.

Futures contracts, or simply futures, (but not future or future contracts) are exchange traded derivatives . The exchange’s clearing house acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement

Exchanges Traded across the globe

Futures contracts (as well as options on futures contracts) are traded at 11 different commodity exchanges in the U.S. as well as abroad. Futures contracts on the major domestic agricultural crops are traded at the Chicago Board of Trade (CBOT), the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange and the Coffee, Sugar and Cocoa Exchange.Click here

Benefits Are Gained From Buying and Selling Futures Contracts:

One of the most important benefits gained from trading in the futures market is that traders can assume any of a wide range of commodities or other assets with a relatively small initial investment. The initial investment includes a commission of approximately $50 per contract and a margin. A margin is a good faith deposit. When a trader assumes a futures position, he or she locks in a price for future delivery for the underlying commodity. This fixed price is the future price at which the contract is bought or sold. Subsequently, as the price of the actual commodity rises or falls, the futures price follows suit, making or losing money.

A benefit derived from selling futures contracts is that it enables the trader to establish, in advance, an approximate price for crops he or she intends to harvest and market at some future time. This provides protection against dangerous price swings, and enables speculators to profit from market fluctuations. Speculators are market participants who have absolutely no interest in owning or selling a physical commodity, but have the money to take on risk buying and selling futures contracts in hopes of making a profit.

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