Futures Let Speculators Take the Risks
Commodities exchanges give speculators the opportunity to bet millions of dollars on the future prices of such goods as soybeans, gold, Treasury bills and frozen orange juice.
The purpose of the futures exchanges is to transfer the risk of price fluctuations from people who don’t want the risk--such as farmers or metals processors--to speculators who are willing to gamble on making big profits.
Futures contracts are agreements to deliver a quantity of goods at a specified price at a certain time in the future. Options, which also are widely traded on the exchanges, give purchasers the right but not the obligation to buy or sell something at a certain price within a specified period.
Commodities traders, standing in recessed “pits” and dressed in brightly colored jackets, shout orders and flash hand signals to each other in a free-for-all auction of contracts.
In a typical transaction on a commodities exchange, a farmer who wants to lock in a guaranteed price for his crop to minimize risk will promise to deliver 20,000 bushels of soybeans at a specified future date at a specified price.
Assuming the price rises, the speculator who buys the contract could later take the beans from the farmer and resell them to someone else at the higher market price, pocketing the profit.
But if the price drops, the speculator would lose money by having to pay the farmer the agreed-upon price and then resell the soybeans at the lower market price.
Speculators rarely end up actually holding mountains of tin or pork bellies because they sell their positions at a profit or loss before the delivery date. The ultimate buyer is a customer who actually needs the commodity.
Although the exchanges began with agricultural products, they have rapidly expanded into financial products. For example, the Chicago Board of Trade does most of its business in contracts based on the value of the Standard & Poor’s 100-stock and 500-stock indexes.
Other major exchanges include the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Commodity Exchange in New York, the New York Cotton Exchange and the Coffee, Sugar & Cocoa Exchange.
