Financial Futures - The Commodities of the Investment Business
Just as dramatic changes in the price of wheat affect farmers, bakers and ultimately the consumer, so changes in interest rates, the relative value of currencies and the direction of the stock market send ripples and sometimes waves though the financial community. With the creation of a market in financial futures, traders like pension fund and mutual fund investment managers and securities firms that rely on financial commodities, can protect themselves against the unexpected. These traders are the hedgers of the financial futures market.
as in the other futures markets active by constant trading. Speculators buy or sell futures contracts depending on which way they think the market is going. World politics, trading patterns and the economy are the unpredictable factors in these markets. Rumors also play a major role. Financial speculators are no more interested in taking delivery of 125,000 francs than grain speculators are in 5,000 bushels of wheat. What they’re interested in is making money on their gamble. So the offsetting technique works here as well, with speculators trying to get out of a contract at what they think is its highest point.
The large variety of financial futures contracts in the marketplace is always in flux. Like other commodities, they trade on specific exchanges, in some cases as the most actively traded commodity. The Chicago Board of Trade’s U.S. Treasury Interest Rate futures, the nations most actively traded contract, accounts for two-thirds of the exchanges business.
The details of financial futures trading are recorded daily. The value of an index contract is calculated differently from other futures contracts. that’s because an index is two steps removed from the commodity. Instead of dollars per yen or a ton of soy beans per dollar, U.S. indexes settle at $500 times the index. rather than taking delivery of the contract which is only numbers in a computer you would take delivery of the cash value of the contract.
Indexes, and futures contracts on those indexes, don’t move in lock step. When they are out of sync, the index futures contract price moves either higher or lower than the index itself. Traders can make a lot of money by simultaneously buying the one that’s less expensive and selling the more expensive. This technique is known as arbitrage, and the chief tool is a very sophisticated computer program following the shifts in price.
