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Commodity Futures
Futures Market Basics
From
the US Commodity Futures Trading Commission (CFTC)
Trading commodity futures and options is not for everyone. It is a volatile, complex, and risky business. Before you invest any money in futures or options contracts, you should:
A futures contract is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Most futures contracts contemplate actual delivery of the commodity can take place to fulfill the contract. However, some futures contracts require cash settlement in lieu of delivery, and most contracts are liquidated before the delivery date. An option on a commodity futures contract gives the buyer of the option the right to convert the option into a futures contract. Futures and options must be executed on the floor of a commodity exchange—with very limited exceptions—and through persons and firms who are registered with the CFTC. Who Uses Futures and Options Markets? Most of the participants in the futures and option markets are commercial or institutional users of the commodities they trade. These users, most of whom are called "hedgers," want the value of their assets to increase and want to limit, if possible, any loss in value. Hedgers may use the commodity markets to take a position that will reduce the risk of financial loss in their assets due to a change in price. Other participants are "speculators" who hope to profit from changes in the price of the futures or option contract. History of Futures Trading in the U.S. Futures contracts for agricultural commodities have been traded in the U.S. for more than 100 years and have been under Federal regulation since the 1920s. In the last 20 years, futures trading has expanded rapidly into many new markets, beyond the domain of traditional physical and agricultural commodities. Futures and options now are offered on many energy commodities such as crude oil, gasoline heating, oil, and natural gas, as well as on a vast array of financial instruments, including foreign currencies, U.S. and foreign government securities, and U.S. and foreign stock indices. In recent years, new futures contracts have been offered in non-traditional commodity areas such as electricity, seafood, dairy products, crop yields, and weather derivatives. Significant Dates in CFTC History gives more information about the history of futures trading. ------------------------------------------------------------------------------------------------------------------------------------------------ Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000. In 1974 the majority of futures trading took place in the agricultural sector. The CFTC's history demonstrates, among other things, how the futures industry has become increasingly varied over time and today encompasses a vast array of highly complex financial futures contracts. Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk. The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets. To learn more: www.cftc.gov -------------------------------------------------------------------------------------------------------------------------------------------- Best Alternative Investment Books ---------------------------------------------------------------------------------------------------------- |
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