Finance and Financial Markets

Third Edition

by Keith Pilbeam

Chapter 13 - Financial Futures

Find an overview and useful learning resources below to accompany Finance and Financial Markets chapter thirteen.

Chapter Introduction

A financial futures contract is an agreement between two counterparties to exchange a specified amount of a financial security (bond, bill, currency or stock) at a fixed future date at a predetermined price. The contract specifies the amount of the asset to be traded, the exchange on which the contract is traded, the delivery date and the process for delivery of the asset and funds. Financial futures contracts were first traded on the Chicago Mercantile Exchange (CME) in the USA in 1972. A decade later London opened the London International Financial Futures Exchange (LIFFE) which in 2001 was merged with the Amsterdam, Paris and Belgium exchanges to create Euronext.LIFFE. Since then Euronext has also merged with the Lisbon Stock Exchange.

Futures contracts have proved very popular for both commodities and financial assets. Among the most popular commodity contracts are futures in gold, oil, cotton and coffee, and for financial futures contracts the most popular are short-term and long-term interest rate contracts, currency contracts and stock-index contracts. Like other financial instruments, futures and forward contracts can be used for both managing risks and assuming speculative positions. We shall examine three different types of futures contract: (i) short-term interest rate futures, (ii) currency futures, and (iii) stock-index futures. We shall consider how each contract can be used for both speculative and hedging purposes and the pricing of each contract.

Learning Objectives

In this chapter you will learn about:
  • ​Different types of financial futures contracts including stock index futures, interest rate futures and currency futures
  • Differences between futures and forward contracts
  • Initial and variation margin payments
  • How to measure open interest and reversing trades
  • How futures can be used for speculative and hedging purposes
  • How to manage risk exposure on futures contracts
  • How different futures contracts are priced

Further Reading

Chisholm, A. (2004) Derivatives Demystified: A Step by Step Guide to Forwards, Futures and Options, Wiley.

Hull, J.C. (2008) Options, Futures and Other Derivatives, Prentice-Hall.

Kolb, R.W. and Overdahl J. (2007) Futures, Options and Swaps, 5th edn, Blackwell.

Multiple Choice Questions

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