Legal Definitions - Chicago Board of Trade

The Chicago Board of Trade (often abbreviated as CBT or CBOT) is a prominent financial marketplace where individuals and organizations buy and sell agreements for the future delivery of various agricultural products. It acts as a central exchange where participants can agree today on a price for commodities such as corn, wheat, soybeans, or livestock, with the actual exchange and delivery scheduled for a specific date in the future. These agreements are known as "futures contracts." The CBOT plays a crucial role in helping manage the financial risks associated with unpredictable price changes for these essential goods.

Here are some examples illustrating how the Chicago Board of Trade operates:

• Imagine a large-scale corn farmer in Nebraska who is preparing for their harvest in six months. The farmer is worried that the price of corn might drop significantly by the time their crop is ready for sale, potentially reducing their income. To mitigate this risk, the farmer can sell a futures contract on the CBOT for a specific quantity of corn at a predetermined price for future delivery. This action allows the farmer to lock in a selling price now, providing financial certainty and protecting them from potential market downturns before their harvest is even complete.

• Consider a major breakfast cereal manufacturer that relies heavily on oats for its products. The company needs a consistent supply of oats throughout the year and wants to ensure predictable costs to manage its budget effectively. To achieve this, the manufacturer can purchase oat futures contracts on the CBOT. By doing so, they secure a fixed price for their raw material months in advance, shielding them from sudden price spikes and allowing them to plan their production expenses with greater confidence.

• An investor, after researching global economic trends and weather patterns, believes that the price of wheat is likely to increase substantially over the next few months. This investor doesn't intend to physically buy or sell wheat but wants to profit from its price movement. They can buy wheat futures contracts on the CBOT. If their prediction is accurate and wheat prices rise, they can then sell their contracts at a higher price before the delivery date, earning a profit from the difference in the buying and selling prices without ever having to handle the physical commodity.