Information about Futures Market
futures; that is a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.
Forward contracts were standard at the time. However, most forward contracts weren't honored by both the buyer and the seller. For instance, if the buyer of a corn forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.
In 1848, the Chicago Board of Trade (CBOT)--the world's first futures exchange--was formed. Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851. In 1865, standardized futures contracts were introduced.
The Chicago Produce Exchange was established in 1874 and renamed the Chicago Mercantile Exchange (CME) in 1898. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc.
In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only exchange for hard red spring wheat futures and options.[1]
Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates. These (in particular the 90-day Eurodollar contract introduced in 1981) had an enormous impact on the development of the interest rate swap market.
Today, the futures markets have far outgrown their agricultural origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over 1.5 trillion U.S. dollars per day in 2005.
The recent history of these exchanges (Aug 2006) finds the Chicago Exchange trading more than 70% of its Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over 45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic trading" as opposed to open outcry trading of Futures, Options and Derivatives. And that is only one of the worlds current Futures Exchanges, albeit the largest one at this writing.
In June of 2001, ICE acquired the International Petroleum Exchange (IPE), now ICE Futures, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE portfolio of energy futures became fully electronic.
In 2006, the New York Stock Exchange teamed up with the London Exchanges "Euronext" electronic exchange to form the first trans-continental Futures and Options Exchange. These two developments as well as the sharp growth of internet Futures trading platforms developed by a number of trading companies clearly points to a race to total internet trading of Futures and Options in the coming years.
The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm. In the simplest case, this is the dollar figure that answers a question of this nature: What is the likely loss that this firm may incur on its portfolio with a 99% confidence and over a period of 2 days? The clause 'with a 99% confidence' and 'over a period 2 days' is to be interpreted as that number such that the actual portfolio loss over 2 days is expected to exceed the number only 1% of the time. Several popular methods are used to compute initial margins. They include the CME-owned SPAN (a grid simulation method used by the CME and about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the OCC), TIMS (earlier used by the OCC, and still being used by a few other exchanges like the Bursa Malaysia.
The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that has already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position. If the resulting amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm (the case with most clearing houses) or kept in reserve depending on local practice. In either case, the positions are 'marked-to-market' by setting their new cost to the market value used in computing this difference. The positions held by the clients of the exchange are marked-to-market daily and the MTM difference computation for the next day would use the new cost figure in its calculation.
Clients hold a margin account with the exchange, and every day the swings in the value of their positions is added to or deducted from their margin account. If the margin account gets too low, they have to replenish it. In this way it is highly unlikely that the client will not be able to fulfill his obligations arising from the contracts. As the clearing house is the counterparty to all their trades, they only have to have one margin account. This is in contrast with OTC derivatives, where issues such as margin accounts have to be negotiated with all counterparties.
For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security.
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History of futures exchanges
Though the origins of futures trading can supposedly be traced to Ancient Greek or Phoenician times, the history of modern futures trading begins in Chicago, United States in the early 1800s. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest, making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.Forward contracts were standard at the time. However, most forward contracts weren't honored by both the buyer and the seller. For instance, if the buyer of a corn forward contract made an agreement to buy corn, and at the time of delivery the price of corn differed dramatically from the original contract price, either the buyer or the seller would back out. Additionally, the forward contracts market was very illiquid and an exchange was needed that would bring together a market to find potential buyers and sellers of a commodity instead of making people bear the burden of finding a buyer or seller.
In 1848, the Chicago Board of Trade (CBOT)--the world's first futures exchange--was formed. Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851. In 1865, standardized futures contracts were introduced.
The Chicago Produce Exchange was established in 1874 and renamed the Chicago Mercantile Exchange (CME) in 1898. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen, Mexican peso, and Swiss franc.
In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only exchange for hard red spring wheat futures and options.[1]
Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the future value of interest rates. These (in particular the 90-day Eurodollar contract introduced in 1981) had an enormous impact on the development of the interest rate swap market.
Today, the futures markets have far outgrown their agricultural origins. With the addition of the New York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the traditional commodity markets, and plays a major role in the global financial system, trading over 1.5 trillion U.S. dollars per day in 2005.
The recent history of these exchanges (Aug 2006) finds the Chicago Exchange trading more than 70% of its Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over 45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic trading" as opposed to open outcry trading of Futures, Options and Derivatives. And that is only one of the worlds current Futures Exchanges, albeit the largest one at this writing.
In June of 2001, ICE acquired the International Petroleum Exchange (IPE), now ICE Futures, which operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE portfolio of energy futures became fully electronic.
In 2006, the New York Stock Exchange teamed up with the London Exchanges "Euronext" electronic exchange to form the first trans-continental Futures and Options Exchange. These two developments as well as the sharp growth of internet Futures trading platforms developed by a number of trading companies clearly points to a race to total internet trading of Futures and Options in the coming years.
Nature of contracts
Exchange traded contracts are not issued like securities, but they are "created" when one party buys (goes long) a contract from another party (who goes short). In the beginning there are no contracts, so the number of long contracts must equal the number of short contracts. This always goes through the exchange, which means that the exchange is the counter party for all trades. However, the exchange does not take any net positions. In this way clients do not know with whom they have ultimately traded. Compare this with securities, in which an issuer issues the security. After that, it is a legal entity that is traded independently of the issuer. Even if the issuer buys back some securities, they still exist. Only if they are legally canceled can they disappear.Standardization
The contracts traded on futures exchanges are always standardized. In principle, the parameters to define a contract are endless (see for instance in futures contract). To make sure liquidity is high, there is only a limited number of standardized contracts.Derivatives Clearing
There is usually a division of responsibility between provision of trading facility and settlement of those trades. While derivative exchanges like the CBOE and LIFFE take responsibility for providing efficient, transparent and orderly trading environments, settlement of the resulting trades are usually handled by Clearing Corporations, also known as Clearing Houses, that serve as central counterparties to trades done in the respective exchanges. For instance, the Options Clearing Corporation and the London Clearing House respectively are the clearing corporations for CBOE and LIFFE. A well known exception to this is the case of Chicago Mercantile Exchange, which clears trades by itself.Central Counterparty
Derivative contracts are leveraged positions whose value is volatile. They are usually more volatile than their underlying asset. This can lead to situations where one party to a trade loses a big sum of money and is unable to honor its settlement obligation. In a safe trading environment, the parties to a trade need to be assured that their counterparty will honor the trade, no matter how the market has moved. This requirement can lead to messy arrangements like credit assessment, setting of trading limits and so on for each counterparty, and take away most of the advantages of a centralised trading facility. To prevent this, Clearing corporations interpose themselves as counterparties to every trade and extend guarantee that the trade will be settled as originally intended. This action is called Novation. As a result, trading firms take no risk on the actual counterparty to the trade, but on the clearing corporation. The clearing corporation is able to take on this risk by adopting an efficient margining process.Margin and Mark-to-Market
Clearing houses charge two types of margins: the Initial Margin and the Mark-To-Market margin (also referred to as Variation Margin).The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing corporation to cover possible future loss in the positions (the set of positions held is also called the portfolio) held by a firm. In the simplest case, this is the dollar figure that answers a question of this nature: What is the likely loss that this firm may incur on its portfolio with a 99% confidence and over a period of 2 days? The clause 'with a 99% confidence' and 'over a period 2 days' is to be interpreted as that number such that the actual portfolio loss over 2 days is expected to exceed the number only 1% of the time. Several popular methods are used to compute initial margins. They include the CME-owned SPAN (a grid simulation method used by the CME and about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the OCC), TIMS (earlier used by the OCC, and still being used by a few other exchanges like the Bursa Malaysia.
The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if any) that has already been incurred on the positions held by a firm. This is computed as the difference between the cost of the position held and the current market value of that position. If the resulting amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm (the case with most clearing houses) or kept in reserve depending on local practice. In either case, the positions are 'marked-to-market' by setting their new cost to the market value used in computing this difference. The positions held by the clients of the exchange are marked-to-market daily and the MTM difference computation for the next day would use the new cost figure in its calculation.
Clients hold a margin account with the exchange, and every day the swings in the value of their positions is added to or deducted from their margin account. If the margin account gets too low, they have to replenish it. In this way it is highly unlikely that the client will not be able to fulfill his obligations arising from the contracts. As the clearing house is the counterparty to all their trades, they only have to have one margin account. This is in contrast with OTC derivatives, where issues such as margin accounts have to be negotiated with all counterparties.
Regulators
Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency:- In Australia, this role is performed by the Australian Securities and Investments Commission
- In the Chinese mainland, by the China Securities Regulatory Commission
- In Hong Kong, by the Securities and Futures Commission
- In India, by the Securities and Exchange Board of India.
- In Singapore by the Monetary Authority of Singapore
- In the UK, futures exchanges are regulated by the Financial Services Authority.
- In the USA, by the Commodity Futures Trading Commission.
See also
- List of futures exchanges
- Commodity markets
- Currency market
- Stock markets
- Bond market
- Trader (finance)
- Paper trading
Notes
1. ^ MGEX via U.S. Futures Exchange (2007). Minneapolis Grain Exchange. and Minter, Adam (August 2006). Gimme Grain!. The Rake. and Buyers & Processors. North Dakota Wheat Commission (2007). Retrieved on 2007-03-29.
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices
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The bond market, also known as the debt, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. The size of the international bond market is an estimated $45 trillion of which the size of outstanding U.S.
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worldwide view.
Fixed income refers to any type of investment that yields a regular (or fixed) return.For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security.
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A corporate bond is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.
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A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
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In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase.
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A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately.
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In financial markets, the stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
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Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than common stock, and its terms are negotiated between the corporation and the investor.
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A stock exchange, share market or bourse is a corporation or mutual organization which provides facilities for stock brokers and traders, to trade company stocks and other securities.
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The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators,
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The Retail forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the larger Foreign exchange market.
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History
Retail trading is more structured than the forex market as a whole...... Click the link for more information.
The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives.
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In finance, a credit derivative is a financial instrument or derivative whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded.
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- Returns: Predictable dividend, often franked therefore possible tax advantage to the holder
- Capital price:
- *Price moves in line with share price (fixed conversion terms e.g.
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Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or
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In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date.
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A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated.
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swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.
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Property law
Part of the common law series
Acquisition of property
Gift · Adverse possession · Deed
Lost, mislaid, and abandoned property
Alienation · Bailment · License
Estates in land
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Part of the common law series
Acquisition of property
Gift · Adverse possession · Deed
Lost, mislaid, and abandoned property
Alienation · Bailment · License
Estates in land
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The Spot Market or Cash Market is a commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
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In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices
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financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial market by Central banks is usually regarded as intervention rather than participation, although evidence exists in the Sprott '"Visible Hand of Uncle Sam"' report that
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