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What is a futures contract and where are futures contracts traded?

Futures contracts are legally binding commitments to deliver or take delivery of a specified quantity or quality of a commodity at a specified future time for a specified price. These products trade by open outcry in the trading pit of a commodity or futures exchange. The delivery time may be four to six weeks in the case of a commodity such as corn or wheat or one day for an index contract.

A futures contract does not entail an immediate transfer of ownership of the underlying security. The contract is set at today’s market prices but the commodity will be delivered sometime in the future. In actual practice, most contracts are closed out to the market before the delivery date so physical deliveries are rare. Only about 2% of all futures contract end with the actual delivery of a commodity.

In addition to agricultural products such as wheat, canola, corn, coffee, cocoa, hogs and cattle, commodities that trade on futures markets include some metals (gold, copper and silver), lumber and energy products such as crude oil and heating oil. Some financial instruments, such as several kinds of interest rate products, stock indices and foreign currencies, trade as futures contracts as well.

The center of commodity futures trading in North America is Chicago where the two largest exchanges, the Chicago Board of Trade and the Chicago Mercantile Exchange, are located. There are also important commodity exchanges in New York, including the New York Mercantile Exchange and the New York Board of Trade.

In Canada, financial futures are listed on the Montreal Exchange (Bourse de Montreal) and agricultural futures on the Winnipeg Commodity Exchange.