To further Jaclyn’s research, I learned about different types of futures markets: equity-based, financial instruments, and commodities. It is interesting to note that until currency futures began trading in 1972, futures markets were designated as commodity markets because the products traded were mainly agricultural. Trading in futures on financial products has boomed since the mid-1970s and now accounts for nearly 75 percent of all derivatives trading volume in the world, with commodities and natural resources accounting for only 25% of today’s volume (Gidel, 2005).
Equity futures occur when an investor commits to buy or sell a specified amount of an individual equity or a basket of equities or an equity index at an agreed contract price on a specified date. Two types of equity futures include index futures and stock futures. An index future uses an index as its underlying – ex: Dow Jones, it settles cash in settlement on a specified date. A stock future has a stock as its underlying and the stock price defines the value of a future contract (Gidel, 2005).
Financial instruments, another form of futures market, include instruments related to interest rates and those related to the value of a country’s currency. When referring to supply and demand in a free market, a greater demand for money results in an increase in the price of the money. This defines the interest rate. The interest rate depends on factors such as the nation’s economic health, levels of government borrowing, and people’s perception of inflation (Gidel, 2005). Financial instruments are not based on agricultural commodities or natural resources.
A commodity market is a market where goods or services are bought and sold. Some examples of commodities include tea, rubber, tin, and copper. In addition, oil and gold are two very popular traded commodities. “Commodity futures are standardized agreements to buy or sell specified quantities of...