WORLD MARKETS      ‘Globalization’ became a buzzword in financial circles during the 1980s. The deregulation of the money markets, the improved computer and telecommunications technology, together with the scrapping of fixed exchange rates, suddenly allowed investors, for the very first time, to begin worldwide trading in both currencies and bonds.      World trade is nothing new; markets in raw materials, or primary commodities have been international for as long as anyone can remember but the more recent development of international and multinational corporations have so increased the growth of trade in goods and services on a global scale that they, in a sense, have opened the door to international trading in just about everything.      Apart from anything else, the shop window in the high street can tell you that prices can go down as well as up and ALL financial investments involve an element of risk. There is no such thing as a safe bet or a certainty and the limitation or the management of risk is a key factor in all money markets.

ACHTUNG! ATTENTION! PERICOLOSO! WARNING!      ‘Don't put all your eggs in one basket’ is a good principle when it comes to investment risk-management.      A stockbroker will operate a portfolio of shares – shares in different companies – and spread the risk for a shareholder. Pension Fund managers will invest in different currencies and bonds in order to safeguard the contributor's money.      But the risks of international trading are much higher than they are at home. It is very possible to mistime when to buy or sell and good planning can often be ruined by sudden movements in foreign currencies.      The world money markets are themselves like financial instruments in a global portfolio.      (Financial instruments are securities or anything else that can be bought and sold on a stock exchange.)      Governments and banks can now invest all around the world in each other – and so spread the risk of something going wrong somewhere, sometime, as well as increasing their chances of making a return.      Multinationals can turn to foreign investors for new equity (shares) capital.  The parent company's home capital market may be too small for them!      There are two more good reasons for them to do this. Since they make things, buy things, sell things and employ people in many different countries, they need liquidity or cash in those different currencies to meet their local costs.      Also, by placing shares all around the world, the risk of a takeover is greatly reduced. By having so many shareholders scattered all over the place, rival corporate raiders would find great difficulty in getting to them.      FUTURES AND OPTIONS      ‘Look before you leap’ is another good principle and it is probably this sort of risk-limitation that has led to the extraordinary growth in Futures, Swaps, and Options.      These relatively new financial instruments are called ‘derivatives’ because they are derived from underlying or non-primary commodities (like frozen orange juice) and financial instruments (like securities).      Primary commodities are raw materials – with little or no processing done to them other than to pack them into agreed units of size, weight, volume or whatever. (Ingots of metal, barrels of oil, bushels of wheat, etc.)      Because primary commodities are so vital to so many underlying commodities – things made from raw materials – and the businesses that process them, their prices can be very high or very low because of good old supply and demand again.      TRADING FUTURES AND OPTIONS      Traditionally, fortunes have been made and lost dealing in raw materials, as a consequence, arriving at the right prices in the commodity markets has remained of vital importance – because they obviously affect the prices of nearly everything else.      A future is a contract between two parties, the seller – who agrees to supply a certain amount of a commodity on a certain date in the future, and a buyer – who agrees to purchase the specified amount at a pre-determined price on the same date.

The purpose of any market is to discover prices: the cost of money of something in demand to someone who supplies it. Unlike many other markets, with their computers and price indices flashing continuously across the screens, commodity markets still trade in the traditional face-to-face manner known as ‘open outcry’.      Bids and offers are shouted out so that they can be heard by everybody. This prevents any cheating or secret price-fixing. Traders stand on the steps of a trading pit, shouting and waving their hands – with their own special buy and sell hand signals – just in case their shouts are misheard!

Based on copious facts and figures relating to supply and demand, trading in commodity futures is carried on in the same way. These contracts are bought and sold by the brokers on behalf of their clients.

WHAT DOES A ‘FUTURE’ MEAN?      When you own a commodity future, you effectively hold the right to buy or sell a given commodity at a set price on a specified date in the future.      The commodity must be durable, available in standard-sized lots or units, free from any external controls by governments or producers, and essentially international in terms of supply and demand.      Frozen orange juice meets all these requirements. Oranges are primary commodities that are grown in many different parts of the world, the extraction of juice is a process  – and so the juice becomes an underlying commodity – and ,finally, the freezing process makes it both durable and measurable.      Agreeing on a price and a quantity at a future date reduces the risk of price fluctuation and also ensures supply. This form of price insurance is known as ‘hedging’. Both producers and consumers can plan ahead on the basis of a known price and quantity at a given time.      WHAT ARE ‘SWAPS’ AND ‘OPTIONS’?      ‘Swaps’ and ‘options’ are refinements to the basic future contract. In a swap, both buyer and seller agree to exchange risks. A buyer may agree to compensate the seller should the market price fall below the price set in the contract.      In turn, the seller may agree to compensate the buyer should the market price rise.      With an option, the buyers pays a fee for the option to pay for a product at the contract price – which is to the buyer's advantage if the market price is higher on the date when the transaction is to take place.      The buyer can also take advantage of the market price on the contract date if they are lower – but in doing so the buyer forfeits the option fee.      As well as commodity futures there are also financial futures and options. Trading in these financial instruments has rocketed from a little over 20,000 contracts in 1975 to over 100 million a year in 1990.      AND WHAT ARE FUTURES?      Instead of dealing in underlying commodities – Financial Futures mainly deal in interest rate futures, currency futures, and stock index futures.

The main attraction of any future or derivative is its built-in ability to hedge risks. The US Futures markets in Chicago dominate worldwide Futures and Options trading – with London and Paris gradually catching up.      There are now futures markets in nearly every financial centre in the world.  But what is the future? Will it always be about supply and demand – with money and human nature squabbling about in between?      It certainly looks that way. Wealth seems to have travelled full circle. Columbus set off to find the treasures of the East. He found the West instead and now most of America is owned by Japan – in futures!