Futures contracts are traded at some of the major exchanges including the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the Tokyo Stock Exchange, the London International Financial Futures Exchange (LIFFE) and, the Paris Marche a Terme d'Instrument Financiers (MATIF).

In formalised trading of futures contracts on exchanges standardised agreements specify the price, quantity and the month of delivery.

Futures markets have their roots in agriculture, but today futures and options are traded on a wide range of products right from wheat to natural gas, the stock indices, precious metals and currencies.

Options on futures can be likened to insurance. An option buyer (the insured) pays a premium to an option seller (the insurance company) for the right to buy or sell a futures contract at a specific price. However, just like in insurance, the option buyer may or may not exercise his right (uses his insurance).

A futures contract includes the following attributes viz.,
Interest rate futures -- it is a contract, which sets a purchase yield or rate of interest on a specified debt security or deposit effective at a future date agreed on at the time of the transaction.

Stock index futures -- a contract that sets a purchase price on a standardised amount of the underlying index for settlement on a specified future date.

Foreign exchange futures -- a contract which involves booking/swapping of currencies at future dates, depending on perception of whether currencies are going to strengthen or weaken.

All these aspects are specific to contracts containing financial assets. Meanwhile, a commodity futures is a contract for physical assets and is used for hedging against the future price of various commodities.

Why futures and options
There are mainly two reasons for futures and options to exist viz., for risk transfers and price discovery. Professionals like the grain merchants, energy firms and the portfolio managers use futures and options to reduce the risk to their business associated with volatile prices. For instance, a flour miller might use a futures contract to set a price now for wheat that he knows he will need to purchase in the future. This, instead of taking a chance of buying the wheat sometime in the future when the prices could be higher.

Similarly, a natural gas producer might use a futures contract to set a price now for the gas he will sell in the future, locking in a profit rather than being exposed to the possibility of lower prices later. These types of futures and options' users are known as hedgers, and are in the market specifically to reduce risk. Investors usually assume risks in exchange for reaping profits. The futures and options market serves this function of risk transfer.

The futures and options market also provides the economy with price discovery. The futures' prices are determined by supply and demand. An exchange itself does not set the price. It simply provides a place where the buyers and sellers can negotiate. If there are more buyers than sellers, the price goes up. Conversely, if the sellers outnumber the buyers, the price falls. The price discovered through the futures market offers valuable economic information on the supply and demand situation in a competitive business environment.

The economic benefit of trading in the futures and options market for the investors is the lowered transaction costs. For instance, an investor wanting to invest in software stocks could opt for a single transaction by way of the software stock index futures contract representing 50 stocks. This, instead of buying and paying commission for stocks separately in 50 different transactions.

Trading futures
Like stocks, gains and losses in futures trading are the result of price changes. If, for instance one has sold a futures contract and the price falls, the trade shows a profit. To profit on a futures trade one could first buy low and then sell high, or reverse the order and sell high, and then buy low.

It is important to understand that losses may be highly leveraged. This implies, if the price moves in the direction that one had anticipated it to, larger profits could be realised in relation to the initial investment made. Conversely, if the prices move in the opposite direction than was anticipated, the losses could be higher in relation to the initial investment.

Options on futures are different from futures themselves in that the most a buyer could lose is the cost of purchasing the option, known as the premium, along with the transaction cost. An option seller, however, has unlimited risks.