What it means
The exchange exists because farmers and millers needed to agree prices before a harvest arrived. Standardised contracts for a fixed quantity and grade, settled through a clearing house, let both sides fix a price months ahead without worrying whether the other would still be solvent at delivery.
Those grain contracts still set reference prices used worldwide. A food manufacturer on another continent may never trade on the exchange, yet its supply contracts can be priced off the published futures price plus a local adjustment known as the basis.
Over time the exchange added financial futures, and contracts on American government bonds became some of the most heavily traded instruments anywhere. Those contracts are how banks and funds adjust interest rate exposure quickly, which is why their prices are watched as a read on where rates are expected to go.
Every contract has a defined size, and that size is where the money is made or lost. A corn contract covers 5,000 bushels, so a move of one cent per bushel changes the contract's value by $50, and the exchange also sets the minimum price increment, called a tick.
Trading is backed by margin, a deposit held by the clearing house and topped up daily as prices move. This daily settlement is why a hedging position can be entirely right about the eventual price and still create an uncomfortable cash demand along the way.
The exchange merged into CME Group, so the trading platform and clearing are now shared, but the CBOT label persists on product specifications and in market commentary. For a non-specialist the practical point is that the name identifies a family of contracts and their rules, not a separate trading floor you need access to.
In practice
Real-world examples.
Example
A bakery group buys 40 wheat futures contracts to cover six months of flour purchases after its mill refuses to quote a fixed price beyond the next quarter. The hedge locks the ingredient cost into the budget, and the finance manager documents that the position exists for price protection rather than speculation.
Example
A bank's treasury team wants to cut its sensitivity to rising interest rates without selling the bonds it holds for liquidity purposes. It sells Treasury futures listed on the exchange, which reduces the measured interest rate exposure in a single trade and can be reversed just as quickly.
Example
A grain merchant agrees in March to deliver maize to a processor in September at a fixed price. It buys futures the same day so that a summer rally cannot turn a profitable contract into a loss, and it treats the daily margin payments as the cost of that certainty.
Formula
Calculation
Profit or loss on a futures position = Price change per unit x Contract size x Number of contracts
A cereal producer expects to buy 50,000 bushels of corn in three months and wants to fix the cost. It buys 10 corn futures contracts of 5,000 bushels each at $4.50 per bushel. If the price rises to $4.70 by expiry, the futures gain is $0.20 x 5,000 x 10 = $10,000, which offsets the extra $10,000 the company now pays its physical supplier. If the price instead falls to $4.35, the futures lose $0.15 x 5,000 x 10 = $7,500 while the cheaper physical corn saves the same $7,500, so the total cost is fixed either way.Case study
Seen in the real world.
Fenwick Mills is an illustrative, invented flour miller used to show how exchange hedging works in practice. It had won a twelve-month supply contract with a supermarket at a fixed price per tonne, which looked attractive until the finance director noticed that wheat was bought monthly at whatever the market asked.
The hedge was sized from the contract itself: 600,000 bushels of wheat equivalent over the year, which at 5,000 bushels per contract meant 120 contracts spread across several delivery months. Wheat then rose by $0.60 per bushel, the physical purchases cost $360,000 more than budgeted, and the futures position gained $0.60 x 5,000 x 120 = $360,000 to offset it.
The fictional complication was cash rather than price. Margin calls arrived weekly while the supermarket paid monthly, so Fenwick had to arrange a $250,000 overdraft purely to fund a hedge that was working exactly as intended.
Watch out
Common mistakes.
- Treating a futures price as a forecast, when it is the price agreed today for later delivery and reflects storage, financing and the current balance of buyers and sellers.
- Hedging without checking contract size, which leaves a business covering 25,000 bushels when it needed 50,000, or twice as much as it intended.
- Budgeting for a hedge as a one-off premium, when futures require margin deposits and daily variation payments that tie up cash before the hedge pays off.
Questions
People also ask.
Is the Chicago Board of Trade still a separate exchange?
No, it was acquired by CME Group and now trades on that group's platform, although the CBOT name remains on the grain and Treasury contract specifications.
Do you have to take delivery of the grain?
Almost never, because most hedgers close the position before expiry and settle the cash difference while buying the physical commodity from their usual supplier.
What is basis in this context?
The gap between the exchange futures price and the local cash price for the same commodity, driven by transport, storage and local supply, and it is the part of the price a futures hedge does not remove.
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