Investments, tenth edition

22.1 

  Existing Contracts 

 Futures and forward contracts are traded on a wide variety of goods in four broad catego-

ries: agricultural commodities, metals and minerals (including energy commodities), for-

eign currencies, and financial futures (fixed-income securities and stock market indexes). 

In addition to indexes on broad stock indexes, one can now trade  single-stock futures   on 

individual stocks and narrowly based indexes. OneChicago has operated an entirely elec-

tronic market in single-stock futures since 2002. The exchange maintains futures markets 

in actively traded stocks with the most liquidity as well as in some popular ETFs such as 

those on the S&P 500 (ticker SPY), the NASDAQ-100 (QQQ), and the Dow Jones Indus-

trial Average (DIA). However, trading volume in single-stock futures has to date been 

somewhat disappointing. 

  Table 22.1  offers a sample of the various contracts trading in 2013. Contracts now trade 

on items that would not have been considered possible only a few years ago, such as elec-

tricity as well as weather futures and options contracts. Weather derivatives (which trade 

on the Chicago Mercantile Exchange) have payoffs that depend on average weather con-

ditions, for example, the number of degree-days by which the temperature in a region 

exceeds or falls short of 65 degrees Fahrenheit. The potential use of these derivatives in 

managing the risk surrounding electricity or oil and natural gas use should be evident.  

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  C H A P T E R  

2 2

 Futures 

Markets

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  While  Table 22.1  includes many contracts, the large and ever-growing array of markets 

makes this list necessarily incomplete. The nearby box discusses some comparatively fan-

ciful futures markets, sometimes called  prediction markets,  in which payoffs may be tied 

to the winner of presidential elections, the box office receipts of a particular movie, or 

anything else in which participants are willing to take positions. 

 Outside the futures markets, a well-developed network of banks and brokers has estab-

lished a forward market in foreign exchange. This forward market is not a formal exchange 

in the sense that the exchange specifies the terms of the traded contract. Instead, partici-

pants in a forward contract may negotiate for delivery of any quantity of goods, whereas 

in the formal futures markets contract size and delivery dates are set by the exchange. In 

forward arrangements, banks and brokers simply negotiate contracts for clients (or them-

selves) as needed. This market is huge. In London alone, the largest currency market, 

around $2 trillion of currency trades each day.