agreement to buy or sell a given amount of a commodity or financial instrument at a specified price in a specified future month. The seller of a futures contract agrees to deliver the item to the buyer of the contract, who agrees to purchase the item. The contract specifies the amount, valuation, method, quality, month and means of delivery, and commodity exchange to be traded in. The month of delivery is the expiration date when the commodity or financial instrument must be delivered.

strategy used to offset investment risk. A perfect hedge is one eliminating the possibility of future gain or loss.

A stockholder worried about declining stock prices, for instance, can hedge his or her holdings by buying a put option on the stock or selling a call option. Someone owning 100 shares of XYZ stock, selling at $70 per share, can hedge his position by buying a put option giving him the right to sell 100 shares at $70 at any time over the next few months. This investor must pay a certain amount of money, called a premium, for these rights. If XYZ stock falls during that time, the investor can exercise his option-that is, sell the stock at $70-thereby preserving the $70 value of the XYZ holdings. The same XYZ stockholder can also hedge his position by selling a call option. In such a transaction, he sells the right to buy XYZ stock at $70 per share for the next few months. In return, he receives a premium. If XYZ stock falls in price, that premium income will offset to some extent the drop in value of the stock.

selling short is another widely used hedging technique.

Investors often try to hedge against inflation by purchasing assets that will rise in value faster than inflation, such as gold, real estate, or other tangible assets.

Large commercial firms that want to be assured of the price they will receive or pay for a commodity will hedge their position by buying and selling simultaneously in the futures market. For example, Hershey's, the chocolate company, will hedge its supplies of cocoa in the futures market to limit the risk of a rise in cocoa prices.Managers of large pools of money such as pension and mutual funds frequently hedge their exposure to currency or interest rate risk by buying or selling futures or options contracts. For example, a global mutual fund manager with a large position in Japanese stocks who thinks the Japanese yen is about to fall in value against the U.S. dollar may buy futures or options on the Japanese yen to offset the projected loss on the currency.

organized, national exchanges where securities, options, and futures contracts are traded by members for their own accounts and for the accounts of customers. In the United States, the stock exchanges are registered with and regulated by the Securities and Exchange Commission (SEC); the commodities exchanges are registered with and regulated by the Commodity Futures Trading Commission (see regulated commodities); where options are traded on an exchange, such activity is regulated by the SEC.

stocks, bonds, subscription rights, subscription warrants, stock option, index options, and other derivative products are traded on various stock exchanges in the United States as well as over the counter. commodity futures, futures option, and financial future are traded on commodities exchanges and also over the counter.

Exchanges listing basic securities-stocks, bonds, rights, warrants, and options on individual stocks-are described in more detail under their respective entries. See below for a description of their futures and other options products:American Stock Exchange (New York) stock index options: Airline Index, China Index, Defense Index, Gold Bugs Index, Test Symbol, Computer Technology, Consumer Index Opt., Cyclical Index Opt., Deutschebank Energy, Eurotop 100 Index, Hong Kong Index, Internet Index, Major Market Index, Min Nasdaq 100, Ms Commodities Index, Nasdaq Biotech Index, Nasdaq 100 Index, Natural Gas Index, Oil Index, Spade Defense Index, The Biotechnology Index, The Broker Dealer Index, The Disk Drive Index, The Japan Index, The Microcap Index, The Morgan Stanley Index, The Pharma Index.
Chicago Board of Trade (Chicago) futures: corn, oats, rough rice, soybeans, soybean oil, soybean meal, wheat, mini-sized corn, mini-sized soybeans, mini-sized wheat, South American soybeans; silver (1,000 ounces, 5,000 ounces), gold (33.2 ounces, 100 ounces); ethanol; U.S. Treasury Bonds, U.S. Treasury notes (10-year, 5-year, 2-year), 30-Day Fed Funds, 10-Year Municipal Note Index, Interest Rate Swaps (10- year, 5-year), mini-sized Eurodollars, Bund, Bobl, Schatz; Dow Jones Industrial Index, mini-sized Dow Jones Industrial Index, Total Market Index, Dow Jones-AIGCI. Options: corn, oats, rough rice, soybeans, soybean oil, soybean meal, wheat; U.S. Treasury bonds, U.S. Treasury notes (10-year, 5-year, 2-year), 30-Day Fed Funds, Flexible U.S. Treasury bonds, Flexible U.S. Treasury notes (10-year, 5-year, 2-year), Interest Rate Swaps (10-year, 5-year); Dow Jones Industrial IndexSM, mini-sized Dow Jones Industrial Index.
Chicago Board Options Exchange (Chicago): equity options, index options, Exchange-Traded Funds (ETFs) options, interest rate options, structured product options, Long-Term Equity AnticiPation Securities (LEAPS), and Flexible Exchange (FLEX) options. CBOE trades options on approximately 1,700 equities, 44 indexes, 54 ETFs, and 4 interest rate products. CBOE introduced options and futures on 12 newly created sector indexes called "PowerPacksSM" in July 2005. The dozen individual sector indexes included in the family of CBOE PowerPacks are banks, biotechnology, gold, Internet, iron and steel, oil, oil services, pharmaceuticals, retail, semiconductor, technology, and telecom indexes. Among the most actively-traded options on indexes at CBOE are S&P 500 Index (SPX); S&P 100 Index (American-Style Exercise, OEX and European-Style Exercise, XEO); S&P Depositary Receipts (SPDRs); Dow Jones Industrial Average (DJX); DIAMONDS Trust, Series 1 (DIA); Nasdaq-100 Index; CBOE Mini-NDX Index (MNX); Nasdaq-100 Index Tracking Stock (QQQ), Russell 2000 Index (RUT), iShares Russell 2000 Index Fund (IWM); Semiconductor HOLDRs Trust (SMH) and iShares Lehman 20+Year Treasury Bond Fund (TLT). Products traded on the CBOE Futures Exchange include futures on: CBOE Volatility Index (VX), CBOE S&P 500 Three Month Variance (VT), CBOE China Index (CX), Mini-Russell 2000 Index (RT), Russell 1000 Index (RN), CBOE DJIAVolatility Index (DV), and CBOE PowerPacksSM Indices.
Chicago Mercantile Exchange (Chicago) foreign currency futures and options: Australian dollar, Brazilian real, British pound, Canadian dollar, Czech Koruna, U.S. dollar index, Euro, E-mini Euro, Hungarian forint, Japanese yen, E-mini Japanese yen, Mexican peso, New Zealand dollar, Norwegian Krone, Polish Zloty, Russian ruble, South African rand, Swedish Krona, Swiss franc. Cross-rate futures and options: Euro FX/Australian dollar, Euro FX/Canadian dollar, Euro FX/Hungarian Forint, Euro FX/Norwegian Krone, Euro FX/Swedish Krona, Australian dollar/Canadian dollar, Canadian dollar/Japanese yen, Australian dollar/Japanese yen, Australian dollar/New Zealand dollar, British pound/Japanese yen, British pound/Swiss franc, Swiss franc/Japanese yen, Euro FX/British pound, Euro FX/Czech Koruna, Euro FX/Japanese yen, Euro FX/Polish Zloty, Euro FX/Swiss franc. Foreign currency-denominated interest rate futures and options: Euroyen, 91-day CETES, 28-day TIIE. Interest rate futures and options: Eurodollar, Eurodollar FRA, 13-week U.S. Treasury bill, 1-month LIBOR (London Interbank Offer Rate), swap futures, turn rate futures, Japanese government bonds, CPI futures, mid-curve options. Stock index futures and options: Standard & Poor's 500, E-Mini S&P 500 Stock Price Index, Standard & Poor's MidCap 400, Nikkei 225 Stock Average, Goldman Sachs Commodity Index, Russell 2000 Stock Price Index, S&P 500/BARRAGrowth Index, S&P 500 BARRAValue Index, NASDAQ 100 Index, E-mini NASDAQ Composite, S&P SmallCap 600, SPCTR Futures, X-Funds, Futures on ETFs E-mini NASDAQ- 100, E-mini S&P 500 MidCap 400, E-mini Russell 1000, E-mini Russell 2000. Alternative investment products: U.S. monthly weather, U.S. seasonal weather, European monthly weather, European seasonal weather, Asia-Pacific monthly weather, Asia-Pacific seasonal weather, ethanol. Agricultural futures and options: live cattle, feeder cattle, lean hogs, frozen pork bellies, milk (Class III & IV), nonfat dry milk, butter, random-length butter, cheese, DAP, UAN, urea.
Kansas City Board of Trade (Kansas City) futures and options: wheat, Value Line Index. Futures: wheat, Value Line Index.
Minneapolis Grain Exchange (Minneapolis) futures and options: hard red spring wheat, Hard Red Winter Wheat Index (HRWI), Hard Red Spring Wheat Index (HRSI), Soft Red Winter Wheat Index (SRWI), National Corn Index (NCI), and National Soybean Index (NSI).
New York Board of Trade agricultural futures and options contracts: cocoa, Coffee "C," Cotton No. 2, ethanol, frozen concentrated orange juice (FCOJ), Sugar No. 11, Sugar No. 14, and pulp. Index and currency marketplace: futures and options on NYSE Composite Index, Reuters/Jefferies CRB Index, Russell 1000, 2000, and 3000 Indexes, the U.S. Dollar Index, and 32 cross-rate currency contracts.
New York Mercantile Exchange (New York) NYMEX Division: futures and options: light, sweet crude oil, New York Harbor unleaded gasoline, heating oil, Henry Hub natural gas, platinum. Futures: palladium. COMEX Division: Futures and options: gold, silver, copper, and aluminum.
Pacific Exchange (San Francisco) Options, LEAPS, and FLEX options on more than 1,800 stocks and ETFs.
Philadelphia Stock Exchange (Philadelphia): currency options: Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, Mexican peso (customized contracts only), Swiss franc, U.S. dollar (customized contracts only); SPDR Options; sector index options: capital markets, insurance, mortgage finance, regional bank, defense, drug, Europe, gold and silver, housing, oil service, semiconductor, utility, media and entertainment, casino gaming, coal producers, footwear and athletic, investment managers, oil exploration and production, semiconductor capital equipment, semiconductor device, specialty retail, steel producers, Internet, bio-clinical trials; FLEX options, LEAPS, HOLDRS; currency futures.