Abstract
This chapter covers the concepts of futures contracts and some of their mathematics. When buying a security in a normal trade, one expects to take delivery and pay for the security in the usual time, typically three business days from the trade date. This is called a cash transaction. The futures contract offers the next step in trading now for a future delivery. A futures contract is a standard contract that can apply to a large number of trades. The contract trades on an organized exchange, with standard contract expiration dates (called settlement or delivery dates), standard products, standard amounts of the product, quoted prices, exchange guarantees of contract fulfillment, margin availability and requirements, and easy and low-cost trading opportunities. Future contracts exist for a wide variety of commodities, where they were first used. Commodities that have future contracts include corn, soybeans, wheat, hogs, and heating oil, among others. Although actual delivery of the underlying commodity of a commodity future is possible and is sometimes done, usually future contracts for commodities are closed out on or before the settlement date.
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