an_introduction_to_cme_foreign_exchange_products.pdfVIP

An Introduction to CME Foreign Exchange Products What Are Futures and Options? Futures contracts are standardized, legally binding agreements to buy or sell a specific product or financial instrument in the future. The buyer and seller of a futures contract agree on a price today for a product to be delivered or settled in cash at a future date. Each contract specifies the quantity, quality and the time and location of delivery and payment. The value of a futures contract is derived from an underlying financial measure or market, such as foreign exchange rates, equity index levels, interest rates or commodity prices – hence the term derivatives. As the value of the underlying measure or market changes, the value of the futures contract based on that measure or market also changes. Institutions and individuals that face financial risk based on the movement of the underlying measure or market can buy or sell futures that will change in value to offset that financial risk. Such transactions are known as hedging. Institutions and individuals also buy and sell futures hoping to profit from price changes. These transactions are considered speculation . CME also offers investors options on futures. Options can be thought of as insurance policies. The option buyer pays a price for the right – but not the obligation – to buy or sell a futures contract within a stated period of time at a predetermined price. The combination of options and futures – both risk-management tools – can give market participants the leverage of futures and the more limited risk of options. Options provide the opportunity to limit losses while maintaining the possibility of profiting from favorable changes in the futures price. Global Leadership in the Financial Marketplace CME is the largest and most diverse financial exchange in the world for trading futures and options – handling nearly 800 million contrac