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Futures Basics

In the United States, trading futures began in the mid-19th century with the establishment of central grain markets where farmers could sell their products either for immediate delivery, also called the spot or cash market, or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner of today’s exchange-traded futures contracts.

Both forward contracts and futures contracts are legal agreements to buy or sell an asset on a specific date or during a specific month. Where forward contracts are negotiated directly between a buyer and a seller and settlement terms may vary from contract to contract, a futures contract is facilitated through a futures exchange and is standardized according to quality, quantity, delivery time and place. The only remaining variable is price, which is discovered through an auction-like process that occurs on the Exchange trading floors or on electronic futures exchanges.

Although trading began with floor trading of traditional agricultural commodities such as grains and livestock, exchange-traded futures have expanded to include metals, energy, currencies, equity indexes and interest rate products, all of which are also traded electronically.

Futures Contracts Forward Contracts Spot Market
Standardized contracts for the purchase
and sale of financial instruments or physical
commodities for future delivery on a regulated
commodity futures exchange.
A private, cash-market agreement between
a buyer and seller for the future delivery of a
commodity, at an agreed upon price. In contrast
to futures contracts, forward contracts are not
standardized and are non-transferable.
A market where cash transactions for the
physical or actual commodity occur.


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