Futures Trading Risk Guide

This publication is the property of National Futures Association

National Futures Association is a Congressionally authorized selfregulatory organization of the United States futures industry. It's mission is to provide innovative regulatory programs and services that ensure futures industry integrity, protect market participants and help NFA Members meet their regulatory responsibilities. This booklet has been prepared as a part of NFA's continuing public education efforts to provide information about the futures industry to potential investors.

Introduction

Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are worldwide meeting places of buyers and sellers of an ever-expanding list of products that includes financial instruments such as U.S. Treasury bonds, stock indexes, and foreign currencies as well as traditional agricultural commodities, metals, and petroleum products. There is also active trading in options on futures contracts allowing option buyers to participate in futures markets with known risk.

Electronic information and communication technologies are providing new and better trading tools and new and more diverse trading opportunities. In some cases, entirely electronic markets function alongside open-outcry markets that have existed for more than a century and a half. Electronic order placement is increasingly commonplace. As such developments help make futures markets more useful to more people, it follows that they have become more widely and extensively used.

Notwithstanding the changes that have and are continuing to occur, the primary purpose of futures markets remains unchanged: To provide an efficient and effective mechanism for the management of price risks. By buying or selling futures contracts that establish a price now for a purchase or sale that will take place at a later time, individuals and businesses are able to achieve what amounts to insurance protection against adverse price changes. It is called hedging.

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