Definition of Future

Future

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Currency future

A financial future contract for the delivery of a specified foreign currency.

Deferred futures

The most distant months of a futures contract. A bond that sells at a discount and does not
pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-inkind
bond.

Expected future cash flows

Projected future cash flows associated with an asset of decision.

Expected future return

The return that is expected to be earned on an asset in the future. Also called the
expected return.

Financial future

A contract entered into now that provides for the delivery of a specified asset in exchange
for the selling price at some specified future date.

Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.

Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures commission merchant

A firm or person engaged in soliciting or accepting and handling orders for
the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection
with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades
or contracts. The FCM must be licensed by the CFTC. Related: commission house , omnibus account

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.

Futures market

A market in which contracts for future delivery of a commodity or a security are bought or sold.

Futures option

An option on a futures contract. Related: options on physicals.

Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.

London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures
as well as futures-style options are traded.

London International Financial Futures Exchange (LIFFE)

London exchange where Eurodollar futures as well as futures-style options are traded.

Most distant futures contract

When several futures contracts are considered, the contract settling last.
Related: nearby futures contract

National Futures Association (NFA)

The futures industry self regulatory organization established in 1982.

Nearby futures contract

When several futures contracts are considered, the contract with the closest
settlement date is called the nearby futures contract. The next futures contract is the one that settles just after
the nearby futures contract. The contract farthest away in time from settlement is called the most distant
futures contract.

Net present value of future investments

The present value of the total sum of NPVs expected to result from
all of the firm's future investments.

Next futures contract

The contract settling immediately after the nearby futures contract.

Spot futures parity theorem

Describes the theoretically correct relationship between spot and futures prices.
Violation of the parity relationship gives rise to arbitrage opportunities.

Theoretical futures price

Also called the fair price, the equilibrium futures price.

Future Value

The amount a given payment, or series of payments, will be worth
at the end of a specified time period, if invested at a given rate

future value

the amount to which one or more sums of
money invested at a specified interest rate will grow over
a specified number of time periods

Future value

The value that a sum of money (the present value) earning
compound interest will have in the future.

future value

Amount to which an investment will grow after earning interest.

futures contract

Exchange-traded promise to buy or sell an asset in the future at a prespecified price.

Futures Contract

A contract in which the seller agrees to provide something to a buyer at a specified future date at an agreed price.

Future-Oriented Financial Information

Information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. future-oriented financial information is presented as either a forecast or a projection.

Future Value

The amount to which a payment or series of payments will grow by a given future date when compounded by a given interest rate. FVIF future value interest factor.

discount rate

the rate of return on investment that would be required by a prudent investor to invest in an asset with a specific level risk. Also, a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.

Actuals

The physical commodity underlying a futures contract. Cash commodity, physical.

Advance commitment

A promise to sell an asset before the seller has lined up purchase of the asset. This
seller can offset risk by purchasing a futures contract to fix the sales price.

Autoregressive

Using past data to predict future data.

Average life

Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.

Backwardation

A market condition in which futures prices are lower in the distant delivery months than in
the nearest delivery month. This situation may occur in when the costs of storing the product until eventual
delivery are effectively subtracted from the price today. The opposite of contango.

Basis

Regarding a futures contract, the difference between the cash price and the futures price observed in the
market. Also, it is the price an investor pays for a security plus any out-of-pocket expenses. It is used to
determine capital gains or losses for tax purposes when the stock is sold.

Call

An option that gives the right to buy the underlying futures contract.

Cash and carry

Purchase of a security and simultaneous sale of a future, with the balance being financed
with a loan or repo.

Cash commodity

The actual physical commodity, as distinguished from a futures contract.

Cash delivery

The provision of some futures contracts that requires not delivery of underlying assets but
settlement according to the cash value of the asset.

Cash settlement contracts

futures contracts, such as stock index futures, that settle for cash, not involving
the delivery of the underlying.

Cash transaction

A transaction where exchange is immediate, as contrasted to a forward contract, which
calls for future delivery of an asset at an agreed-upon price.

CFTC

The Commodity futures Trading Commission is the federal agency created by Congress to regulate
futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures
trading had been regulated by the Commodity Exchange Authority of the USDA.

Cheapest to deliver issue

The acceptable Treasury security with the highest implied repo rate; the rate that a
seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

Clearing house / Clearinghouse

An adjunct to a futures exchange through which transactions executed its floor are settled by a
process of matching purchases and sales. A clearing organization is also charged with the proper conduct of
delivery procedures and the adequate financing of the entire operation.

Commission house

A firm which buys and sells future contracts for customer accounts. Related: futures
commission merchant, omnibus account.

Commitment

A trader is said to have a commitment when he assumes the obligation to accept or make
delivery on a futures contract. Related: Open interest

Commodities Exchange Center (CEC)

The location of five New York futures exchanges: Commodity
Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.

Commodity

A commodity is food, metal, or another physical substance that investors buy or sell, usually via
futures contracts.

Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

Contango

A market condition in which futures prices are higher in the distant delivery months.

Contract

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

Contract month

The month in which futures contracts may be satisfied by making or accepting a delivery.
Also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and
P/E ratios and higher dividend yields, seeing value where others do not.

Convenience yield

The extra advantage that firms derive from holding the commodity rather than the future.

Conventional project

A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).

Convergence

The movement of the price of a futures contract toward the price of the underlying cash
commodity. At the start, the contract price is higher because of the time value. But as the contract nears
expiration, the futures price and the cash price converge.

Conversion factors

Rules set by the Chicago Board of Trade for determining the invoice price of each
acceptable deliverable Treasury issue against the Treasury Bond futures contract.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Cross hedging

The practice of hedging with a futures contract that is different from the underlying being
hedged.

Deliverable instrument

The asset in a forward contract that will be delivered in the future at an agree-upon price.

Delivery

The tender and receipt of an actual commodity or financial instrument in settlement of a futures contract.

Delivery notice

The written notice given by the seller of his intention to make delivery against an open, short
futures position on a particular date. Related: notice day

Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.

Delivery points

Those points designated by futures exchanges at which the financial instrument or
commodity covered by a futures contract may be delivered in fulfillment of such contract.

Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.

Derivative instruments

Contracts such as options and futures whose price is derived from the price of the
underlying financial asset.

Derivative security

A financial security, such as an option, or future, whose value is derived in part from the
value and characteristics of another security, the underlying security.

Discount factor

Present value of $1 received at a stated future date.

Discounted cash flow (DCF)

future cash flows multiplied by discount factors to obtain present values.

Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

Discounting

Calculating the present value of a future amount. The process is opposite to compounding.

Dollar roll

Similar to the reverse repurchase agreement - a simultaneous agreement to sell a security held in a
portfolio with purchase of a similar security at a future date at an agreed-upon price.

Draft

An unconventional order in writing - signed by a person, usually the exporter, and addressed to the
importer - ordering the importer or the importer's agent to pay, on demand (sight draft) or at a fixed future
date (time draft), the amount specified on its face.

Drop, the

With the dollar roll transaction the difference between the sale price of a mortgage-backed passthrough,
and its re-purchase price on a future date at a predetermined price.

Equity

Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
assuming its liquidation at the going market price.

Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
are traded. Principal US stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange
(AMEX) and the National Association of Securities Dealers (NASDAQ)

Exercise price

The price at which the underlying future or options contract may be bought or sold.

Expectations hypothesis theories

Theories of the term structure of interest rates which include the pure
expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories
hold that each forward rate equals the expected future interest rate for the relevant period. These three theories
differ, however, on whether other factors also affect forward rates, and how.
Expectations theory of forward exchange rates A theory of foreign exchange rates that holds that the
expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange
rate.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Extrapolative statistical models

Models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

Fair price

The equilibrium price for futures contracts. Also called the theoretical futures price, which equals
the spot price continuously compounded at the cost of carry rate for some time interval.

Figuring the tail

Calculating the yield at which a future money market (one available some period hence) is
purchased when that future security is created by buying an existing instrument and financing the initial
portion of its life with a term repo.

Financial plan

A financial blueprint for the financial future of a firm.

Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.

First notice day

The first day, varying by contracts and exchanges, on which notices of intent to deliver
actual financial instruments or physical commodities against futures are authorized.

Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.

Forward contract

A cash market transaction in which delivery of the commodity is deferred until after the
contract has been made. It is not standardized and is not traded on organized exchanges. Although the
delivery is made in the future, the price is determined at the initial trade date.

Forward cover

Purchase or sale of forward foreign currency in order to offset a known future cash flow.

Forward delivery

A transaction in which the settlement will occur on a specified date in the future at a price
agreed upon on the trade date.

Forward exchange rate

Exchange rate fixed today for exchanging currency at some future date.

Forward Fed funds

Fed funds traded for future delivery.

Forward forward contract

In Eurocurrencies, a contract under which a deposit of fixed maturity is agreed to
at a fixed price for future delivery.

Forward interest rate

Interest rate fixed today on a loan to be made at some future date.

Forward market

A market in which participants agree to trade some commodity, security, or foreign
exchange at a fixed price for future delivery.

Forward rate

A projection of future interest rates calculated from either the spot rates or the yield curve.

Forward rate agreement (FRA)

Agreement to borrow or lend at a specified future date at an interest rate
that is fixed today.

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