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+Cl,apter 34: Futures and Futures Options 6S3 
+are traded in order to receive complete details. However, whenever examples are 
+used, full details of the contracts used in those examples are given. 
+FUTURES CONTRACTS 
+Before getting into options on futures, a few words about futures contracts them­
+selves may prove beneficial. Recall that a futures contract is a standardized contract 
+calling for the delivery of a specified quantity of a certain commodity at some future 
+time. Future contracts are listed on a wide variety of commodities and financial 
+instruments. In some cases, one must make or take delivery of a specific quantity of 
+a physical commodity (50,000 bushels of soybeans, for example). These are known as 
+futures on physicals. In others, the futures settle for cash as do the S&P 500 Index 
+futures described in a previous chapter; there are other futures that have this same 
+feature (Eurodollar time deposits, for example). These types of futures are cash­
+based, or cash settlement, futures. 
+In terms of total numbers of contracts listed on the various exchanges, the more 
+common type of futures contract is one with a physical commodity underlying it. 
+These are sometimes broken down into subcategories, such as agricultural futures 
+(those on soybeans, oats, coffee, or orange juice) and financial futures (those on U.S. 
+Treasury bonds, bills, and notes). 
+Traders not familiar with futures sometimes get them confused with options. 
+There really is very little resemblance between futures and options. Think of futures 
+as stock with an expiration date. 
+That is, futures contracts can rise dramatically in price and can fall all the way 
+to nearly zero (theoretically), just as the price of a stock can. Thus, there is great 
+potential for risk. Conversely, with ownership of an option, risk is limited. The only 
+real similarity between futures and options is that both have an expiration date. In 
+reality, futures behave much like stock, and the novice should understand that con­
+cept before moving on. 
+HEDGING 
+The primary economic function of futures markets is hedging - taking a futures 
+position to offset the risk of actually owning the physical commodity. The physical 
+commodity or financial instrument is known as the "cash." For index futures, this 
+hedging was designed to remove the risk from owning stocks (the "cash market" that 
+underlies index futures). A portfolio manager who owned a large quantity of stocks 
+could sell index futures against the stock to remove much of the price risk of that