Saturday, September 29, 2007

Financial Futures - The Commodities of the Investment Business

Just as dramatic changes in the price of wheat affect farmers, bakers and ultimately consumers. So do changes in interest rates, the value of currencies and the direction of the stock market takes can send ripples and sometimes even waves crashing though the financial community. With the creation of financial futures, traders like pension and mutual funds investment managers rely on financial commodities to protect themselves against the unexpected. These traders are the hedgers of the financial futures market.

Along with the other futures markets that active with constant trading. Speculators buy and 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 taking hold of 5,000 bushels of wheat. These traders are interested in making money on their gamble.

The large variety of financial futures contracts in the marketplace are always in flux. Like other commodities, they trade on specific exchanges. The Chicago Board of Trade's U.S. Treasury Interest Rate futures, is the nations most actively traded contract. Their accounts make up 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. This is because the price index is two steps removed from the commodity. Instead of taking delivery of a contract, that is only numbers in a computer. Traders take delivery of the cash value of the contract.

Indexes, and futures contracts on these indexes, don't move in locked steps. When they are out of sync, index future contract prices will either move higher or lower than the index itself. Traders can make a lot of money by simultaneously buying contracts that are less expensive and selling the more expensive contracts. This technique is known as arbitrage, and the chief tool being used here, is a very sophisticated computer program that follows the price shifts.

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