Futures Lock in price on delivery day – no option involved obligation.  Must be willing to pay that price for delivery.

Futures price has to be greater than the spot price.  The Difference is the basis.  Determined by what you didn’t put up.  You could earn the risk free rate on free funds until maturity.  Futures move before stocks do so temporarily they might go under the spot price but it won’t last in equilibrium (because of the arbitrage opportunity) (future>spot)

Because cost to carry future is less than carrying the stock, basis should = present value.

Players in futures markets:
 Speculators
 Hedgers
 Arbitrageurs

Favorite to hedge with institutional investors (they hold S&P portfolios)

S&P futures trade on Merck (biggest)

The further out in the future you go the higher the price
Price changes in tandem
Most trading in current contract
Relatively small amount of money controls a large amount

Futures are relatively new (started in 1981)

Both options and futures started in Chicago – not New York
 Developed Chicago Board of Options Exchange and CME (Mercantile)
 Agricultural background