Futures Contract - Looking Forward to the Future!

A Futures Contract is a universally regulated agreement to buy or sell a product at a particular date in the future, at a pre-determined price. The pre-fixed date is known as the final settlement date and the price is known as the futures price. Both parties - the buyer and the seller of the contract - must fulfill the contract on the final settlement date. Futures contracts include detailed information about the quality and quantity of the product. Some futures contracts require the physical delivery of the product, while others are settled through cash payments. Futures contracts are standardized to facilitate transactions.

What are some Examples of Futures Contracts?

Some examples of Futures contract are:

• corn futures (CBOT)
• gold futures (COMEX)
• crude oil futures (NYMEX)
• stock index futures (CME)
• Eurodollar futures (IMM)
• bond futures (CBOT)

All these contracts are self explanatory as the transactions involve the physical assets named. However, the Stock Index Futures Contract needs an explanation. This is a Futures contract that has a number of stocks brought together to form an index. The advantage of this Futures Contract is investors have the option of a wide range of equities, reduced price risk, and a secure portfolio of investments.

What are the Guidelines and Specifications of a Futures Contract?

Since futures contract are flexible, and are privately negotiated, specifications and guidelines are necessary to detail the nature of these agreements. The first responsibility of the parties involved in this type of contract is to lay down the Futures Contract specifications and guidelines. The factors that need to be considered are:

• The asset - The quality of the product or the asset must be specified.
• Contract size - The amount of the asset delivered under one contract.
• Delivery arrangements - The seller will choose the exact date when the asset will be delivered.
• Price quotes - The way that the futures prices are quoted needs to be specified. Some futures are quoted as dollars and 32s of a dollar. This will also define the minimum price movements, the tick, in this case $1/32.
• Limit up/down -It has to be specified the limit of the price of the futures contract, when trading would stop. This is to prevent speculation.
• Position limits - The maximum number of contracts that the agent is allowed to hold has to be regulated. These include the total number of contracts that can be held and the maximum number of contracts expiring in any particular month. This also prevents speculation in the market.

Continue to: Differences between Futures and a Forward Contract