Welcome to the CME Education Department’s Instant Web Lessons. If you’re a newcomer to the futures markets and want a quick introduction to futures and options, these lessons will get you started learning what you need to know. The lessons are short, each one introducing a few concepts or set of facts. You can study the lessons in order or select your preferences from this list.
- Futures Contract A futures contract is an agreement to buy or sell a commodity at a date in the future. Everything about a futures contract is standardized except its price. All of the terms under which the commodity, service or financial instrument is to be transferred are established before active trading begins, so neither side is hampered by ambiguity. The price for a futures contract is what’s determined in the trading pit or on the electronic trading system of a futures exchange.
- Futures Exchange Futures contracts are traded at a futures exchange and only at a futures exchange. Chicago Mercantile Exchange (CME), like the other exchanges in the U.S., provides a place to trade, formulates rules for trading and supervises trading practices. There are currently eight futures exchanges in the U.S.
- Contracts Traded Founded in 1898 as a not-for-profit corporation, in November 2000 CME became the first U.S. financial exchange to demutualize and become a shareholder-owned corporation.
- Supply and Demand The price of agricultural commodities fluctuates, foreign exchange rates change from minute to minute, interest rates and equity indexes rise and fall. Nothing stays the same. And that's why futures are so useful and so essential to business operations all over the world.
- Fundamental Analysis Fundamental analysis is the study of the factors that affect supply and demand. The key to fundamental analysis is to gather and interpret this information and then to act before this information is incorporated into the futures price. This lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.
- Technical Analysis This approach to price prediction is based on the premise that price movements follow consistent historical patterns. Those who engage in technical analysis study charts or statistics that measure price movements and try to find repetitive patterns. They start with the basic bar chart that plots high, low and closing prices of a futures contract over the life of the contract. Current activity is watched carefully for familiar patterns of price movement.
- Orders in the Pit A futures brokerage firm ("house") that is a member of Chicago Mercantile Exchange (CME) places orders to buy or sell futures or options contracts for companies or individuals and earns a commission on each transaction. Everyone who trades futures and options on futures contracts must have an account with a futures brokerage house, which is officially called Futures Commission Merchant (FCM). Futures brokerages are not the same as stock brokerages, but some companies are licensed to trade both stocks and futures.
- Trading Pit Even though more and more futures contracts are being traded online, there’s still plenty of action in the trading pits at Chicago Mercantile Exchange (CME) and other U.S. exchanges. That’s where traders determine futures prices, which change from minute to minute as trading goes on.
- Who’s Who in and Around the Trading Pit? All the traders in the pits are members of CME. They may be private speculators who trade for their own profit. Or they may be floor brokers who act as agents for customers of brokerage firms. Dividing the trading floors (one downstairs and one upstairs) into sections are rows of workstations or desks. This is where orders are called or sent electronically into the brokerage firms from customers. Different colored jackets help to identify all the people on the CME trading floor.
- Risk Management Chicago Mercantile Exchange provides and regulates a marketplace where futures and options on futures are traded. CME clears, settles and guarantees all matched transactions in CME contracts occurring through its facilities. Furthermore, it establishes and monitors financial requirements for clearing members and sets minimum “performance bond” levels for all CME-traded products. The financial integrity of the CME marketplace is a foremost consideration of the Exchange’s Board of Directors and management.
- Hedges & Speculators All people who trade futures contracts are not speculators. People who buy and sell the actual commodities can use the futures markets to protect themselves from commodity prices that move against them. They’re called hedgers. Speculators assume risk for hedgers. Speculators accept risk in the futures markets, trying to profit from price changes. Hedgers use the futures markets to avoid risk, protecting themselves against price changes.
- Options on Futures Options on futures were introduced in the 1980s. An option contract allows you the right, but not the obligation, to buy or sell an underlying futures contract at a particular price.
- Reading Quotes Futures prices are published for every trading session, and previous day prices are reported daily in major newspapers such as The Wall Street Journal (Section 2). You can also get prices for contracts traded at CME on the CME web site www.cmegroup.com and from a number of different quote vendors. Contracts are grouped into like commodities such as Food and Fiber, Metals and Petroleum, Financial, Livestock and Meat.
- GLOBEX GLOBEX is Chicago Mercantile Exchange’s global electronic trading system. The system offers computerized order entry and trade matching on a wide range of futures and options products, virtually 24 hours a day, to people around the world.
- Hand Signals Hand signals - the sign language of futures trading -- represent a unique system of communication that effectively conveys the basic information needed to conduct business on the trading floor. The signals let traders and other floor employees know how much is being bid and asked, how many contracts are at stake, what the expiration months are, the types of orders and the status of the orders.
- Expiration Months All futures contracts have an expiration month; thus, there are standard hand signals that indicate each month.
Contents Courtesy of CME Group.