Futures Underlying Contracts divide into two general underlying asset categories: commodities and financials. Each category splits into separate individual asset subcategories. Commodities are bulk physical assets. Financial futures are based on underlying assets trading in the marketplace. Currency futures are based on monetary denominations of various nations, and the trade which connects them. Futures contracts are used to secure future prices in advance. Contracts also secure the quality of an asset to be delivered if they have discernible quality grades. Physical contracts are often defined in grades, such as differing strains of foods or differing production qualities.
Commodity Futures Division
Commodity Futures divide into three general categories: Agricultural, Energy, and Metals. These categories further divide into separate classifications.
Agricultural Futures are traded at many exchanges, and are a major future market division. Contracts are heavily used by farmers and industry producers to control future prices received for their goods in the open market. Crops, due to disasters or pests, can come in a wide number of qualities. Even at the same quality level, there are substantial varieties between goods. Just think of how many types of grapes and apples you can purchase at a single grocery store. Futures allow for both quality and crop category control. If a deliverer cannot meet specific quality requirements, they may substitute a higher end or lower end good. The prices charged via the contract will be raised or reduced accordingly. Contracts are also useful for producers, retailers, restaurants, and other receivers to specify their delivery point. Futures may allow purchasers to prepare their supply chain by specifying or identifying delivery locations. Agricultural futures categories include Cocoa, Coffee, Concentrated Juices, Corn, Livestock varieties, Soy, Sugar, and Wheat.
Energy Futures trade products used to generate power and fuels. Energy contracts are actively traded to secure prices and supply chains which are otherwise easily interruptible. These contracts are a necessary resource for avoiding price shocks. Many oil nations are in geopolitically unstable areas. Securing prices and supply with futures is essential for crucial energy resources. Energy futures categories include coal, crude oil, electricity, ethanol, natural gas, nuclear, solar, and wind. Sources which are not deliverable, like wind, are often settled in cash. Their profit and loss is determined by reported rates versus average rates, and the difference’s implied effects on production capacity.
Futures with precious and common metals as the underlying asset are heavily traded. This market can be volatile due to geopolitical and production concerns. Precious metals are often used to store value when calamity hits equity markets. Metals have readily accessible market values, while equities are based on far more abstract estimations of corporate future cash flows. Metal futures can be used to secure prices before geopolitical or economic concerns result in price increases. Producers can use futures to secure a steady supply of gold in the future at current prices to ensure any unseen incident does not disrupt their supply or expenditures. Metal futures traders have the luxury of not being concerned with local production grades. Unlike agricultural futures, mined ores and alloys are refined to purity standard before reaching the financial marketplace. Metal futures categories include Aluminum, Copper, Gold, Nickel, Palladium, Platinum, Silver, Steel, and Zinc. Most alloys are manufactured from these combinations, with a notable exception being steel, which is so widely used it trades its own futures. All of these metals are commonly used for industry purposes; others have previously been used as currency and are still seen as viable for value preservation in market crashes.
Financial Futures Divisions
Financial Futures divide into multiple categories. These futures have financial instruments as their underlying asset. Commodity futures used to be the major category, but financial futures have slowly overtaken them as the primary futures market. Financial Futures include currency, equity, index, interest rate, and transportation futures.
Currency Futures are commonly established by institutional participants within the foreign exchange marketplace. Currency futures allow investors to guarantee future exchange rates today. One of the currency pairs is almost always the American Dollar, due to its high usage in foreign exchange markets. Currency values change regularly due to geopolitical, economic, business, and natural events. Currency futures give investors the ability to secure a specific amount of coinage in trade for another before events disrupt or improve exchange rates.
Equity Futures are contracts with shares as their underlying investment. They are only transacted on shares which have very active trading. If the share’s trading volume or liquidity cannot support futures trading, there will not be a futures contract available for that asset.
Transportation Futures are used to control shipping rates and secure freight shipping. The price of transporting commodities heavily affects expenses for producers, refiners, manufacturers, and retailers. Reducing these costs by securing rates in advance and hedging against future rate increases lowers production costs.
Index Futures use financial indexes as their underlying assets. The buy side or sell side position is taken based on expectations that index price levels will rise or fall by the delivery date. The purchase of index futures bet the index price will rise. Sell-side positions bet the index price will fall.
Interest Rate Futures
Interest Rate Futures are used to hedge against interest changes. Interest rates adversely affect multiple asset categories; futures can provide profits from interest rate movements via buy or sale positions. This profit offsets potential risks created by rate changes. Interest rate futures are created in both long and short terms. Speculators often use futures to acquire profit from interest rate changes while avoiding direct bond or treasury trading.
Weather Futures are one of many odd future categories. The future’s contract depends on average weather conditions for a defined time period in relation to contract values. They can be measured in wind, precipitation, occurrences, temperature, or other measurements. Weather futures are heavily traded due to their impact on commodities. Inclement weather conditions can easily ruin commodity production cycles, especially in agriculture.
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International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
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