Some Insight Into The World of Futures Quotes

If you are new to the world of futures trading, it is difficult to emphasis the importance that futures quotes play. Suffice to say, there would be no future market without futures quotes!

Without over emphasizing the issue, futures trading is a speculative world where two parties agree to the price of product before the product is ready to be delivered. Consequently, futures quotes will vary a vast array of issues, most of which will be completely separate from the world of finance altogether.  Moreover, during the course of futures contracts, the quotes will change.

How futures quotes are determined?

Essentially, however, the role that futures quotes have in the futures market can be assessed as follows:

Party A wants to take a position in oranges (a commodity). Party B, an orange grower, want to sell a position in his oranges.  In January Party A agrees that in his estimate come August oranges will be $100 ton, and offers to buy a ton of Party B's oranges.  As it happens, Party B would rather like to get $100 for a ton of his oranges as he only got $85 per ton last harvest; therefore he agrees.  Thus, the futures option contract is fixed - $100 per ton of oranges being the futures option quote / price. 

Now, in scenario 1, come February there's a frost and half the orange crop is lost. Suddenly Party A is in the money, futures quotes for oranges are going through the roof and, luckily for him, Party A already has a position at $100. Here, Party A can either chose to offload his futures contract to another investor/trader at the then prevailing market rate, or hold his position (especially if he thinks the price is going to go up more).

On the other hand, in scenario 2 we have weather conditions that make this year a bumper harvest for oranges. Indeed, there have never been so many oranges.  As a result futures quotes for oranges go through the floor. Now, all of a sudden, oranges are only trading at $50 per ton of oranges. Consequently Party A is out of pocket, whereas Party B is rather happy he made the deal he did. 

A final scenario is where you have a year and harvest along the lines anticipated by both parties and oranges come in at $100 per ton come harvest time. It is this scenario 3 situation that futures quotes and contracts were designed for. Unfortunately, however, scenarios 1 and 2 prevail over scenario 3 more often than not - especially in the world we live in today!

Hopefully the above can give you some insight into the world of futures quotes, how they work and how futures quotes are determined. The scenario examples above should also provide you with evidence as to why it is critical, as a futures trader, to keep a very careful eye on the quotes so that you can be in the best position possible to determine whether or not the futures you're interested in are moving into positive or negative territory - thereby determining whether or not you need to buy, sell or hold your futures position.