Ask TheStreet: Future Feature

But what if there is no glut by the time August rolls around? What if there is a shortage and the price of corn skyrockets?

In that case, the farmer's decision to lock in a price may have given him peace of mind back in June, but it proved to be a poor call. He will be forced to deliver his corn at the agreed-upon price, which is lower than the current market value.

Meanwhile, the folks at Kellogg are jumping for joy because they locked in a cheaper price for corn a few months ago.

It's important to realize, however, that in this example, the nervous farmer holds the contract until expiration. In reality, he has the option to change his mind as prices fluctuate between June and August. He can buy and sell contracts to speculate and hedge as the date approaches.

That's the beauty of the futures market.

In fact, the farmer never even has to deliver the corn. He can just keep trading around it. Remember that you don't have to be a farmer to buy corn futures; you can always settle for cash instead of corn.

Speaking of cash and cash settlements, these very same concepts apply to trading stock index futures, the kind to which CNBC refers to every morning before the market opens.

The CME launched its first stock-index futures contract on the S&P 500 in 1982. Since then, futures contracts have been rolled out on a wide range of indices that traders can use to hedge against falling stock prices or take advantage of rising prices -- without having to actually buy or sell individual stocks.

The folks on CNBC usually refer to futures contracts on a market index in relation to their "fair value." According to the CME, fair value represents "the level at which futures theoretically should be priced in relation to cash index values in the absence of transaction costs -- albeit not where they necessarily will trade."

Or, put more simply, fair value can be considered the "actual value" of the index at a future date given the current level of interest rates.

If the futures are above fair value, then traders are wagering the market index will rise higher. If the futures are below fair value, then the opposite is true and stocks likely will move lower.

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