Chicago Mercantile Exchange

The Chicago Mercantile Exchange (CME) is a market exchange where commodity and financial FUTURES and OPTIONS contracts are bought and sold. Created in 1898 as the Chicago Butter and Egg Board, the CME is used primarily by investors, managers, and broker/dealers to reduce risk in business transactions. Traditionally farmers and other agricultural-industry members used futures contracts— agreements to buy or sell a specific amount of a commodity at a particular price on or before stipulated date—to hedge their risk. Initially the CME specialized in butter-and-egg markets, while the Chicago Board of Trade focused on grain markets. Today both exchanges compete in offering a wide array of futures contracts. Farmers sell futures contracts for commodities they produce, thereby assuring themselves of a price for their products. 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, offsetting 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. The CME is regulated by the COMMODITY FUTURES TRADING COMMISSION (CFTC), created to oversee the CME and other exchanges. In the last two decades, the CME, CHICAGO BOARD OF TRADE, Chicago Board of Exchange, NEW YORK MERCANTILE EXCHANGE, and other smaller regional markets have competed, providing new options and futures contracts to meet the needs of financial markets and managers. 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. In 2000, 231 million contracts valued at $155 trillion were traded on the CME. Today the Chicago Mercantile Exchange facilitates trading in a wide array of agricultural, currency, interest rate, and indexes including butter, cheese, frozen pork bellies, Australian dollars, Japanese Yen, Euros, 90-day U.S. Treasury Bills, 10-year Japanese Government BONDS, STANDARD & POOR’S 500 Index, Russell 2000 Stock Price Index, and even heating and cooling degree indexes.