Futures Markets

A futures market is an auction market where traders buy and sell futures contracts for delivery on a specific future date according to the terms of the contract. Futures markets are also called futures exchanges.

Well developed and effective futures markets facilitate transactions without impacting the underlying assets. These markets attract hedgers who are inclined to minimize the risk. They also encourage competition among the traders who come with varied market information and price judgment. A large number of traders participate in the buying and selling activities. These activities are based upon the global information pertaining to trends in demand and supply.

Futures Market and the Nature of Contracts

The futures contracts that are traded in the futures markets are standardized by these exchanges. Specific features of the contracts such as the nature of the underlying assets, their quantity, the pricing and the delivery date are delimited by the futures exchanges. The exchanges also specify the currency in which the transaction is to be made.

Working of the Futures Market

On the first day of trading of opening of the market, there are no actual contracts that exist but there are only specifications. These futures contracts are different from other stocks in as much as they are created when a buyer first buys the contract. The action of buying a contract is also known as ‘go long.’ The other party who sells such contract is known to ‘go short.’ Traders may resell their contracts for reducing their long positions or re-buy in order to reduce their short positions.

Futures Markets and Clearing Houses

While the trading facilities are provided by the futures markets, thesettlement of these trades is provided by the respective clearing houses. The clearing houses, also known as the clearing corporations, work as the central counterparties to their respective exchanges. For example, the Options Clearing Corporation is the clearing corporation for CBOE. Similarly, the London Clearing House works as the clearing corporation for LIFE. However, an exception to this rule is the Chicago Mercantile Exchange, which serves as the trade facilitator as well as the clearing corporation.