FUTURES and OPTIONS ON FUTURES

Futures are standardized contracts which are traded on recognized exchanges. The standardization defines the contract's quantities, pricing variations and limits, trading hours, basis grades or benchmarks, margining, settlement procedures, invoicing, and rules among many other things.

Futures are used for risk management, investing, and speculative purposes. Important institutional users are: banks, brokers, dealers, B/Ds, mutual funds, investment companies, insurers, producers, and other organizations which have financial interests and exposures.

Some individuals may also be suitable users of these basic derivatives products.

Often futures are used to adjust the risk exposures or profiles of actual or cash securities or anticipated positions. For example, an indexed mutual fund might purchase futures contracts in order to invest an influx of new money. Then the next day this mutual fund may liquidate the recently established long futures positions as it makes purchases in the underlying stocks or securities.

One key purpose for the existence of futures and other derivatives is to modify risk exposures. This occurs when unacceptable risks are transferred from one trading party to another. These parties can be producers and consumers or hedgers and speculators. In a simple form, futures operations transform inventory, portfolio, or pricing risks into more manageable basis risks. More about the basis and its risks later.


For more information, this online site contains many references for Derivatives. The following list highlights some of these references.


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