Future Market

A market in which contracts are traded for future delivery of commodities (coffee, gold ) , currencies (marks, ponds ) and financial instruments ( Treasury bills, certificates of deposit). The purchase or sale of a futures contract requires that a deposit, called margin, be maintained with a broker. The market is designed in such a way that it is easy to get out of a contract or cancel it.

The vast majority of the participants , the buyers and seller of futures contracts , do not intend to take delivery or deliver , what they bought or sold. Futures contracts are used as an investment vehicles and as a vehicle for hedging positions.

As an example, a manufacturer of gold jewelry who has bought gold on the spot or cash market will sell gold in the futures market until the time when the jewelry is completed and sold in the wholesale or retail market. At that time the manufacturer will buy gold in the futures market. If the price of gold rose in the meantime , he losses on the futures contracts but obtains a higher price for his gold jewelry.

If the price of gold fell down in the meantime . he makes profit on the futures contract but obtain a lower price for his gold jewelry. The sale of a futures contract protected him against fluctuations in the price of gold; however, he never intended to deliver gold under that contract.

Certificate of Deposit. ( CD )

A placement of funds for a certain period of time with a bank for which the depositor of the funds receives a confirmation which makes the deposit receipt a negotiable instrument . Investment bankers create a secondary market where CD’s can be purchased and sold prior to maturity.

Investors usually accept a smaller interest rate on CD’s than on regular time deposits because investment is more liquid , that is, the CD can be converted into cash at any time without asking the bank to break the deposit. CDs were originally invented in the United States in the early sixties and were used in the domestic U.S money market.

They were later also used for external dollar in several financial centers. The technique is so attractive that the instrument has also been introduced into the domestic money market of several other countries .

Effective Interest Rates.

The amount of money , expressed as per annum percentage , actually paid on a loan or deposit. The effective interest rate may differ from the nominal interest rate, depending on interest payment schedule .

For instance , when the interest is deducted from a loan when the load is first made , the actual proceeds available to the borrower are less than the nominal loan principal used to calculate the interest payments. The effective interest rate in this case is the interest payments expressed as a percentage of the actual proceeds on a per annum basis.