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Futures traders are traditionally placed in one of two groups: hedgers, who have an interest in the underlying commodity and are seeking to hedge out the risk of price changes; and speculators, who seek to make a profit by predicting market moves and buying a commodity "on paper" for which they have no practical use.
Hedgers typically include producers and consumers of a commodity.
For example, in traditional commodities markets farmers often sell futures for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. In modern (financial) markets, "producers" of interest rate swaps or equity derivative products will use financial futures or equity index futures to reduce or remove the risk on the swap.
The social utility of futures markets is considered to be mainly in the transfer of risk between traders with different risk preferences, from a hedger to a speculator for example.
In many cases, options are traded on futures. A put is the option to sell a futures contract, and a call is the option to buy a futures contract; for both, the option strike price is the specified futures price at which the future is traded if the option is exercised. See the Black model, which is used for the pricing of these option contracts.
All futures transactions in the United States are regulated by the Commodity Futures Trading Commission (CFTC), an independent agency of the United States Government. The Commission has the right to hand out fines and other punishments for an individual or company who breaks any rule. Although by law the commission regulates all transactions, each exchange can have their own rule, and under contract can fine companies for different things or extend the fine that the CFTC hands out.
For the album Futures by Jimmy Eat World see Futures (album).
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