History
First
used to fix the price of olives the first exchange was the Dojima Rice Exchange in
Japan in the 1730s.
Modern
futures contract were originally created as forward contracts and traded
at the Chicago Board of Trade (CBOT). Today Futures cover a diverse
rage of commodities and financial instruments.
They are designed to protect so the buyer or seller of
a commodity against price fluctuations by smoothing them out over
the period of the contract. This means the farmer can give business
certainty to the buyer and have security in locking in estimated
profit.
The up side is, if price decreases the seller is
protected but if the price increases the seller is out of pocket the
for the difference and vice versa for the buyer; if price increases
the buyer is protected and if the price decreases they are
responsible for paying the variation in margin. However there are
also ways to hedged if price moves in the wrong
direction.
Once the term of the contract is expired the holder of
the futures contract is expected to take delivery of the asset. In
the case of financial futures, the asset is intangible and a cash
settlement would take place. Such financial futures contracts
include currencies, securities, interest rates and stock index
futures.
