Futures 101 - Chapter 5

Chapter 5: The Process of Price Discovery

Futures prices increase or decrease largely because of the myriad factors that influence buyers’ and sellers’ expectations about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).

As new supply and demand developments occur and as more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward. This process of reassessment of price discovery is continuous.

On any given day the price of a July futures contract will reflect the consensus of buyers’ and sellers’ current opinions about what the value of the commodity will be when the con-tract expires in July. As new or more accurate information becomes available or as expectations change, the July futures price may in-crease or decrease.

Competitive price discovery is a major economic function—and, indeed, a major economic benefit—of futures trading. Through this competition all available information about the future value of a commodity is con-tinuously translated into the language of price, providing a dynamic barometer of supply and demand. Price "transparency" assures that everyone has access to the same information at the same time.