Chicago Board of Trade

The Chicago Board of Trade (CBOT) is a market exchange where commodity and financial FUTURES and OPTIONS contracts are bought and sold. Created in 1848, the CBOT is used primarily by investors, managers, and broker/dealers to reduce risk in business transactions. Initially the CBOT focused on grain trade, allowing farmers and other agricultural- industry members to hedge or reduce their risk of price changes by using futures contracts. Futures contracts—agreements to buy or sell a specific amount of a commodity at a particular price on or before a stipulated date—allow sellers to secure a price for their output and buyers to control the future cost of their inputs. If, in the time between their sale of the futures contract and when their products are ready for market, the commodity price goes down, farmers will be able to buy back their futures contract at a lower price. They profit by the difference and thus offset the lower market price for their product. If the price goes up, they will lose money on the futures contract but will profit from the higher price in the marketplace. Likewise, for a food-products company buying a futures contract, if prices rise in the interim, the value of their contract rises, offsetting the higher market price for their inputs. If prices decline, the food-products company’s contract declines in value, but the cost of the inputs also declines in the marketplace. Unlike stocks, which convey an ownership interest in a CORPORATION, futures contracts are standardized agreements defining the quantity, quality, delivery date, and location for a commodity or security. The CBOT estimates only 4 percent of all contracts result in delivery. The primary purpose of futures contracts is to provide protection against price changes for a specified period of time. As the maturity date of a futures contract approaches, traders who are “long” (having bought a futures contract) or “short” (having sold a futures contract) close their position by doing the opposite of their initial trade. The CBOT is regulated by the COMMODITY FUTURES TRADING COMMISSION (CFTC), created to oversee the CBOT and other exchanges. In the last two decades, the CBOT, CHICAGO MERCANTILE EXCHANGE, Chicago Board of Exchange, NEW YORK MERCANTILE EXCHANGE, and other smaller regional markets have competed in providing new options and futures contracts to meet the needs of financial markets and managers. In addition to grains, the CBOT trades in U.S. Treasury bond futures, DOW JONES AVERAGES, silver, gold, and energy futures. In 1999 over 254 million contracts were traded on the CBOT. Where futures contracts obligate the buyer and seller to a specified agreement, options contracts provide the buyer or seller the right to buy or sell at a specified price. If the option is not exercised by the maturity date, it expires with the buyer losing the amount of money they paid for the option. Prices of futures and options can be quite volatile. In addition to being used by managers to reduce risk, speculators add liquidity to commodity and futures markets and profit when they correctly anticipate price changes in the market. There are over 85 commodity exchanges around the world. Most, like the CBOT, are colorful places where traders in a “pit” shout and use hand signals to communicate their buy and sell orders. Pit activity can be quite physical. Professional football players have been known to find second careers working in the pits of the CBOT and Chicago Mercantile Exchange.