Commonly traded classes of futures are grains (wheat, soybean, corn); metals (gold, silver); livestock (pork bellies, live cattle); financials (equity index, government bonds, Eurodollars); and exotics (weather, pollution emissions).
futures are a type of financial future that tracks popular broad-based indices, such as
the S&P 500
(RTY) and the
Also, equity index futures contracts are cash settled, which means that upon expiration -- rather than upon delivery of assets as with the S&P 500 stocks -- a final cash gain and loss is passed between the contacting parties.
2. Futures Pricing: Cheaper Now or Later?
As the name implies, futures represent some forward
of an asset. This raises the question, "Is it cheaper to buy the asset today or in the future?" Thus, we have to begin the process by determining a break-even or
price for a future relative to the current
(or cash price). In order to do so, you have to consider two important variables: interest and
: Let's say that the spot price for the SPX is currently $1,600 and you are contemplating the purchase of a futures contract with a
of exactly three months from now. Currently, you can borrow money at your corner
or bank at a rate of 6% for a three-month maturity. So if you borrowed $1,600 today, then in three months' time (a quarter of a year), you would have to return $1,624 to the lender ($1,600
6% of $1,600
25%). Thus, in a world devoid of dividends, with so little interest accrued, you would probably be indifferent to whether you paid $1,600 for the SPX today in the current market or $1,624 for the SPX in the future.