What is a Futures Exchange?

James Doehring

In finance, a futures exchange is a medium in which people can trade futures contracts. Futures contracts have a value that depends on the future price of a good. Those who speculate that the price of a good will increase may seek out corresponding futures contracts. Those wishing to protect themselves against declining value of a good may seek to trade or sell any futures they possess. Futures exchanges were originally physical meeting spaces, but the term can now refer to online trading systems.

Currency is traded on a futures exchange.
Currency is traded on a futures exchange.

A futures contract is an agreement to buy a particular good or service in the future. Both the price of the asset and the date of the transaction must be specified ahead of time. If a buyer suspects that the value of a good will increase, thus leaving it in short supply, he may be motivated to sign a futures contract. This can guarantee access to the good, even if it becomes scarce and expensive. The motivation for the seller to sign a futures contract, on the other hand, is to protect against the possibility that the good’s value will go down.

A futures option gives a buyer the right to purchase a good at a future date and at predetermined price. Buyers of futures options are not obligated to make the purchase—rather, they reserve the option to do so. Sellers can charge a premium to buyers and therefore profit from the agreement. Like futures contracts, futures options have a certain inherit value that does not depend on the buyers personally using the good in question. Trading different futures and options with other buyers is the function of a futures exchange.

Traditionally, a futures exchange was a physical location where futures were traded. The Chicago Mercantile Exchange (CME), founded in 1898, is one such example that is still in existence. Speculating on the future value of certain goods, buyers at a futures exchange would trade their futures contracts for ones they felt would prove more fruitful. It would not be important to the original seller of a futures contract who ultimately possessed it, so long as the contract was still legally binding.

Today, a futures exchange can refer to online trading of futures. Like all sorts of online financial transactions, futures and options can be traded electronically without a physical meeting location. While the CME originally served as a meeting place for the exchange of futures, it now serves a global group of customers online.

Futures originally were contracts to purchase goods at certain prices. They now have expanded to include currencies as well. A currency future is an agreement to purchase an amount of currency at a future date and at a predetermined exchange rate. In the same way that the future price of goods, such as oil, cannot be determined with certainty, future currency exchange rates are open to speculation. Buyers looking to profit from a currency rising in value often seek out currency futures.

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