Financial Futures Market

The financial futures market is set up to allow for the trading of a financial instrument at a future point in time. For example, in January of 1989, one might sell a Treasury bond contract that is to be closed out in June of 1989. The sales price of the June 1989 contract is established by the initial January transaction. However, a subsequent bark off purchase of a June 1989 contract at a currently unknown price will be necessary to close out the transaction. In the futures market, you do not physically deliver the goods; you merely execute a later transaction that reverses your initial position. Thus, if you initially sell a futures contract, you later buy a contract that covers your initial sale. If you initially buy a futures contract, the opposite is true and you later sell a contract that covers your initial purchase position.

In the case of selling a Treasury bond futures contract, the subsequent pattern of interest rates will determine whether it is profitable or not. If interest rates go up, Treasury bond prices will go down and you will be able to buy a subsequent contract at a lower price than the sales value you initially established. This will result in a profitable transaction. Note the following example.

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