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Futures Markets Intro

In: Business and Management

Submitted By stevenstrong
Words 7282
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es FIN 4720: Futures Markets Handout #1

Spring 2014 Terrence F. Martell, Ph.D. Mert Demir

Introduction: The Futures Markets
A Forward/Futures contract is an agreement to buy or sell a commodity sometime in the future with the price determined today. A Forward contract is a contract negotiated in the present that gives the contract holder both right and full legal obligation to conduct a transaction at a specific future time involving a specific quantity and type of asset at a predetermined price. For example, you can agree today to sell copper with another party on a specific future date at a specific predetermined price. A Futures contract is a type of forward contract with highly standardized and closely specified contract terms. As in all forward contracts, a futures contract calls for the exchange of some goods at a future date for cash, with the payment for the goods to occur at that future date. Futures contracts always trade on an organized market.

Five fundamental types of futures contracts
1. Agricultural and Metallurgical Contracts: Physical goods contracts cover a wide range of products: grains, seeds, food, fiber, livestock, meat, metals and petroleum. The months for delivery for seasonal agricultural products are chosen to fit their harvest patterns. The number of contract months depends on the level of trading activity. 2. Interest-Earning Assets: in the US, treasury notes, treasury bonds, and Eurodollar deposits. Interest rate futures started trading in 1975 and have experience tremendous growth since then. Existing contracts span the entire yield curve, so it is possible to trade instruments with just about any maturity 3. Foreign Currencies: Japanese yen, British pound, Canadian dollar, Swiss franc, Australian dollar and Euro currency. Currency trading started in the early 1972. 4. Indexes: Dow index, NASDAQ index, S&P500 index, NIKKEI,

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