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Understanding Futures Market Essentials: Definitions, History, and Strategies

Master the intricacies of futures contracts, commodities, hedging, and speculation while exploring the Chicago Board of Trade's origins and contract components. Discover how futures markets influence prices, motivations for farmers, purchasers, and speculators, and the nuances of going long versus short. Learn about physical vs. cash-settlement contracts, margin requirements, leverage, and optimal market participation options.

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Understanding Futures Market Essentials: Definitions, History, and Strategies

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  1. Objectives: by the end of this unit, students will… • Define each of the following: a. Futures Contract b. Commodity c. Futures Market d. Hedger e. Speculator • Summarize the conditions through which the Chicago Board of Trade began. • Identify which components of a futures contract are negotiable and which are not. • Summarize how the futures market enables prices of commodities to become public knowledge. • Explain the incentives for each of the following to become involved in the futures market: farmers, purchasers, and speculators. • Summarize what it means to go long vs. go short. • Explain the difference between a physical contract and a cash settlement contract. • Summarize why a company would choose a cash-settlement contract instead of exchanging the commodity • Define each of the following: a. Initial Margin b. Maintenance Margin c. Margin Call d. Leverage • Under given conditions, state whether it would be better to go long or go short. • Summarize each of the following options for participation in the futures market: a. Open your own account. b. Have someone manage your account. c. Trading Advisor d. Commodity Pool.

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