Atlanta Journal and Constitution

                            July 30, 2003, Wednesday

KR-ACC-NO AT-FUTURES-MKRT

LENGTH 579 words

HEADLINE Futures Markets Help Run Economy

BYLINE By Tom Walker

BODY


   The Pentagon's aborted scheme for a futures-style market to predict Middle
East events --- including terrorist acts --- would have been a knockoff of the
old and reliable U.S. futures market.

   Famed for its raucous pits, the market is where everything trades --- from
corn and cotton to currencies, gold, gas, beef, bonds, soybeans and stock market
indexes.

   The Policy Analysis Market would have been a futures market in name only,
with no commodities or securities changing hands. A monetary payoff would reward
correct prediction of some political or military outcome, paid from the pool of
investor funds attracted to the market.

   The novice investor might have been hard put to tell the difference between
the Pentagon's market and the arcane and complex actual market.

   The latter appears a dangerous affair offering a chance for great gain but
also the prospect of great loss, a market best left to the professionals.

   The mere sight of wildly gesticulating traders in color-coded jackets
shouting and waving bits of paper at each other is enough to intimidate even
experienced investors.

   Beneath that mayhem is a logical way to buy, sell and speculate in a host of
commodities and financial assets.

   Wall Street monitors futures and options markets for clues to the betting on
where stock and bond prices will be in a month, six months, or a year.

   According to Richard Teweles in "The Futures Game," such markets "provide
continuous, accurate, well-publicized price information."

   A futures contract is an obligation to buy or sell a specific commodity or
security on a specific future date for a specified price. An options contract is
similar, except that it entails only the right to buy or sell a specific item in
the future at a specified price.

   An options trader can walk away from the contract when it expires. The
futures trader may have to take possession of a carload of corn, unless the
contract has been traded before it expires.

   Futures and options are derivatives --- their value depends on the value of
an underlying asset. A share of stock represents ownership in a company; a stock
index futures contract is an investor's bet on which way the price of a stock or
other commodity will move in the future.

   As such, a futures contract is a hedge against loss.

   Consider a Kansas farmer whose wheat crop won't be ready for harvest for
three months. That's time enough for some event, like a sudden market glut, to
lower the price.

   To protect the wheat, the farmer can sell futures contracts equal to the crop
's value. He intends to deliver the wheat, fulfilling his obligation under the
contract. But the futures contract guarantees payment at the contract price,
even if the market price dips. If it rises, so much the better.

   The process works just as well for the buyer. A baking company may fear the
price of wheat will go up over the next three months.

   To protect against that event, the baker buys futures contracts at the
current price. Three months later, the baker obtains the wheat at no more than
the contract price, even if the market price has risen.

   While speculation has a bad connotation for some, speculators are important.
In a sense, they provide much of the money that makes the markets work --- and
they make, or lose, money for themselves in the process.