Binary Options – Comparing Futures And Forwards

The futures market is the average persons marketplace for deferred delivery. These markets trade standardized contracts (e.g., every gold contract traded on the New York Commodity Exchange is identically the same), and they transact downstairs in a pit on Commodity Futures Trading Commission regulated exchanges. They typically call themselves futures exchanges. If you cant find what you want on the futures exchange and you have a relationship with a forward market dealer, you can trade there. They will create specially tailored contracts for anything you wantfor a price.

Thats one primary difference between the two markets: Futures have only one standard item that you can trade. Take it or leave it. One size fits all. On the other hand, the forward market dealer will make any changes you want (if you are a client), but charges extra.

Lets use the gold futures contract as an example. On the New York you can trade gold futures with a contract size of 100 ounces. The bars can have only a small weight tolerance, say, plus or minus 2 percent. You cannot deliver 142 ounces. There are six main delivery dates each year: the first business day of February, April, June, August, October, and December. The bars cant be forged at just any refinery, there are lists of acceptable refiners.

Those are the main requirements, but the list of specifics goes on and on. The exchange publishes rule books with dozens of pages per commodity to legally specify all the standards for deliveries. And they discuss myriad market scenarios, like defaults. There is an important benefit that derives from standardizing. Standardization allows fungibility and liquidity. Fungibility means that, in the eyes of the market, each item is identical and interchangeable. This is true of our currency: each $1 bill is identical and exchangeable with every other $1 bill. Otherwise chaos ensues. Fungibility encourages liquidity. Liquidity is the ability to quickly and easily exchange an asset. Futures markets create enormous liquidity by funneling all the buyers and sellers into a single fungible asset. The customer must deal with those few specialists who trade offbeat dates. The price quote will be far less competitive.

The prices are cheap and the service is quick, but the menu is scanty. You cant expect elegant service or high-quality food. But the price is right if you want a quick hamburger. On the other hand, in the forward market you might feel like they serve the down-home cooking at Alices Restaurant. And as Arlo Guthrie told us, You can get anything you want at Alices Restaurant. But it might cost more. Oh, yes indeed, lots more.

Binary options will definitely help you. In order to understand binary options better, read this article once more.