There are U.S. and foreign exchange traded Futures and Options contracts
in the following catagories:
- Energy Products
- Equity Indexes
- Food products
- Foreign currency
- Industrial products
- Interest Rates
- Precious metals
Many physical and financial products have cash and forward markets that set
prices
in relation
to the Futures markets:
Cash Market: Your deliverable product’s quality and quantity are known, but the date
is
uncertain or you have an impending delivery but don’t like the
prevailing price.
Forward Contract: An agreement entered into by two parties for the future delivery of a
specified commodity under specified terms.
Forward contracts’ potential problems:
Futures Prices: Many forward contracts are set relative to the price of an exchange-traded
futures contract. It is important to note that this does not protect from fluctuations in that
futures contract. The Futures price is often the largest portion of a forward contract’s delivery
price and, therefore, holds the most price risk.
A large price change in the futures market on or before the delivery date may drastically affect your bottom line (Positive or negative). If you don’t protect yourself, you are speculating by default.
Counterparty risk: One party’s inability or unwillingness to meet the contract terms. Have you
(or are you aware of someone who has) been a victim of counter-party default? There are
times when parties are locked into a contract with terms they feel are unfavorable because it
is the best available at the time.
Illiquidity: Changes in your business that necessitate terminating the agreement
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