Trading in Futures

In the United States and elsewhere around the world, futures contracts for a remarkable variety of items are routinely bought and sold. The types of contracts available are traditionally divided into two groups, commodity futures and financial futures. With a financial future, the underlying goods are financial assets such as stocks, bonds, or currencies. With a commodity future, the underlying goods can be just about anything other than a financial asset.

There are commodity futures contracts on a wide variety of agricultural products such as corn, orange juice, and, yes, pork bellies. There is even a contract on fertilizer. There are commodity contracts on precious metals such as gold and silver, and there are contracts on basic goods such as copper and lumber. There are contracts on various petroleum products such as crude oil, heating oil, and gasoline.

Wherever there is price volatility, there may be a demand for a futures contract, and new futures contracts are introduced on a fairly regular basis. For example, by some estimates, the potential value of wholesale trade in electricity in the United States is more than $100 billion a year, dwarfing the market for many other commodities such as gold,

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

23. Risk Management: An Introduction to Financial Engineering

© The McGraw-Hill Companies, 2002

CHAPTER 23 Risk Management: An Introduction to Financial Engineering copper, wheat, and corn. Electricity producers, who own generating capacity, are "long" (i.e., own) large quantities of the commodity. As the market develops, new futures contracts will allow energy producers and (large) consumers to hedge their transactions in electricity. Whether such contracts will be successful remains to be seen. Many new contracts don't pan out because there is not enough volume; such contracts are simply discontinued.

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