Futures

Background

Futures are standardized financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price.

Historical Context

The concept of futures can be traced back to the Japanese rice exchanges in the 17th century. However, the modern futures market took shape in the mid-19th century with the establishment of the Chicago Board of Trade (CBOT).

Definitions and Concepts

Futures Contracts: Legally binding agreements to buy or sell a specific quantity of an asset at a predetermined price at a future date.
Financial Futures: A variety of futures contracts where the underlying assets are financial instruments like currencies, interest rates, or market indices.
Interest-Rate Futures: Futures contracts based on a specified financial instrument with interest rates as the underlying variable asset.

Major Analytical Frameworks

Classical Economics

In classical economics, futures can be seen as mechanisms for stabilizing markets by redistributing risk and increasing price discovery through market liquidity.

Neoclassical Economics

Neoclassical economics emphasizes the role of futures in providing hedging opportunities against price volatility. Futures markets thus ensure that resources are allocated efficiently.

Keynesian Economic

From a Keynesian perspective, futures allow entities to manage aggregate demand uncertainty by fixing prices for future deliveries, stabilizing economic cycles.

Marxian Economics

Marxian economists may critique futures markets as tools of capitalist speculation, designed more for profit maximization by traders than for their practical hedging benefits.

Institutional Economics

Institutional economists focus on the structures and rules governing futures markets, examining the role of exchanges and clearinghouses in reducing information asymmetry and transactional risks.

Behavioral Economics

Behavioral economists investigate the irrational behaviors and anomalies in futures trading, such as overtrading or mispricing due to cognitive biases.

Post-Keynesian Economics

Post-Keynesian economists focus on the role of futures in liquidity preference and uncertainty, noting the functions they serve in mitigating financial instability.

Austrian Economics

Austrian economists value futures markets for their role in entrepreneurship and market signals, helping coordinate plans and decisions based on price movements and future expectations.

Development Economics

Development economists assess the impact of futures on emerging markets, highlighting their potential in providing price stability and hedging opportunities for emerging economies.

Monetarism

Monetarists examine the relationship between futures markets, monetary policy, and inflation expectations, stressing how futures pricing can reflect market anticipations of economic trends.

Comparative Analysis

Comparative analysis of futures includes contrasting merits and demerits concerning spot markets, examining risk management capabilities, market efficiency, and the role in price stabilization across various asset classes.

Case Studies

The 1973 Oil Crisis: How oil futures helped stabilize oil prices during geopolitical turbulence.
Housing Market Crash 2008: Evaluation of how futures contracts on mortgage-backed securities affected financial markets.
Post-COVID Economic Recovery: The role of various financial futures in stabilizing exchange rates and interest rates in the aftermath of the pandemic.

Suggested Books for Further Studies

Futures, Options, and Swaps by Robert Kolb and James Overdahl.
Options, Futures, and Other Derivatives by John C. Hull.
Trading Commodity Futures with Classical Chart Patterns by Larry Pesavento.

Spot Market: The market where financial instruments, commodities, or other assets are traded for immediate delivery.
Option: A financial derivative that provides the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before a specified date.
Hedge: An investment strategy used to offset potential losses/gains in another investment.