Principles of Corporate Finance_ 12th Edition

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Chapter 26 Managing Risk 681


bre44380_ch26_673-706.indd 681 09/30/15 12:09 PM


For many firms the wide fluctuations in interest rates and exchange rates have become
at least as important a source of risk as changes in commodity prices. Financial futures are
similar to commodity futures, but instead of placing an order to buy or sell a commodity at a
future date, you place an order to buy or sell a financial asset at a future date. Table 26.2 lists
some important financial futures. Like Table 26.1 it is far from complete. For example, you
can also trade futures on the Thai stock market index, the Hungarian forint, Finnish govern-
ment bonds, and many other financial assets.
Almost every day some new futures contract seems to be invented. At first there may be just
a few private deals between a bank and its customers, but if the idea proves popular, one of the
futures exchanges will try to muscle in on the business. For example, in the last few years the
Chicago Mercantile Exchange has offered futures contracts on the weather in 24 U.S. cities.


The Mechanics of Futures Trading


When you buy or sell a futures contract, the price is fixed today but payment is not made until
later. You will, however, be asked to put up margin in the form of either cash or Treasury bills
to demonstrate that you have the money to honor your side of the bargain. As long as you earn
interest on the margined securities, there is no cost to you.


Future Exchange Future Exchange
Corn CBOT, DCE Aluminum LME, SHFE
Wheat CBOT Copper COMEX, LME, MCX, SHFE
Gold COMEX, MCX
Palm Oil DCE Lead LME, MCX
Soybeans CBOT, DCE Nickel LME, MCX
Soybean meal CBOT, DCE Silver COMEX, MCX
Soybean oil CBOT, DCE Tin LME
Zinc LME, SHFE
Live cattle CME
Lean hogs CME Crude oil ICE, MCX, NYMEX
Gas oil ICE
Cocoa LIFFE Heating oil NYMEX
Coffee ICE Natural gas ICE, NYMEX
Cotton ICE Unleaded gasoline NYMEX
Lumber CME
Orange juice ICE Electricity NYMEX
Rubber SHFE
Sugar ICE, ZCE

❱ TABLE 26.1^ Some important commodity futures and some of the exchanges on which they are traded.


CBOT Chicago Board of Trade
CME Chicago Mercantile Exchange
COMEX Commodity Exchange Division
DCE Dalian Commodity Exchange (China)
ICE Intercontinental Exchange
LIFFE ICE LIFFE

LME London Metal Exchange
MCX Multi Commodity Exchange (India)
NYMEX New York Mercantile Exchange
SHFE Shanghai Futures Exchange
ZCE Zhengzhou Commodity Exchange

Key to abbreviations:
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