When one sees the price of a certain commodity, he or she doesn't realize they see the price for the current futures contract of that commodity. Because of the high price of gas, everyone talk about the price of oil. People make it big news when the price crosses a boundary, like $100. The media gets that price from the front-month contract of oil.

WHAT IS IT?

Basically, a futures contract is the right to have a commodity delivered to the person owning the contract on a certain date in the future. They are different from forward contracts because the buyer and seller agree to a specific date for delivery. The seller agrees to give the buyer a certain commodity at a certain date for a preset price. Most future contracts are for a certain good, like oil or wheat. Other contracts are settled in cash, like the S&P 500 contract. They are traded on commodity exchanges, like the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME).

HISTORY

Future contracts have been around since the 1800's. The first contracts were used for agricultural commodities, like wheat or corn. Through time, more and more contracts were introduced to satisfy the needs of businesses and speculators. Today contracts are available for everything from gold to lumber to Euro currency. The most traded contract is the NYMEX's oil contract. That's because oil is the most important resource in the world.

FUTURE QUOTES

When anyone wants to see the price of a certain commodity, their broker will probably show them a whole list of quotes. That is because each commodity has many different futures contract that trade for it, each with a different date of settlement. Some commodities only trade contracts that expire four different months of the year; others have a contract for each month of the year. The first price they usually see is the front month futures contract. A front month contract is simply the futures contract that is closest to expiration. That contract is bought or sold by most people because it is the heaviest traded future of the whole group. However, sometimes it is wise not to buy it if the contract is close to expiring. No one wants to it stuck with 1000 physical barrels of oil.

PRICING

One thing about futures contracts that can be confusing is how much money it takes to buy one. When someone is shown the quote price for a contract, they are seeing the price of one unit of that contract. An example would be oil.

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