WHAT IS A FUTURES CONTRACT?
A Futures Contract is a standardized contractual agreement, made on the trading floors of a futures exchange to buy or sell a specified commodity or financial instrument at a certain price at a future point in time.
The future date is the delivery date or final settlement date. The price of the futures contract at the end of a trading session on the exchange is the settlement price for that day of business on the exchange. These can’t be referred as ‘direct’ securities as in the case of stocks or bonds.
Futures contracts elaborate the quality and quantity of the underlying asset. They are responsible to facilitate trading on a futures exchange. Some of the futures contracts may demand for physical delivery of the asset, while others are stabled in cash.
|Australian Dollar||6A||CME||100K AUD||H, M, U, Z||0.0001 / 10.00 $||0 $|
|British Pound||6B||CME||62.5 K GBP||H, M, U, Z||0.0001 / 6.25 $||0 $|
|Canadian Dollar||6C||CME||100 K CAD||H, M, U, Z||0.001 / 10.00 $||0 $|
|Euro||6E||CME||125 K EUR||H, M, U, Z||0.00005 / 6.25 $||0 $|
|Japanese Yen||6J||CME||12.5 JPY||H, M, U, Z||0.000005 / 6.25 $||0 $|
|Gold||GC||COMEX||100 OZ||G, J, M, Q, V, Z||0.1 / 10.00 $||0 $|
|Crude Oil||CL||NYMEX||1000 Barrels||All||0.01 / 10 $||0 $|
Expiration (also known as maturity or expiry date) refers to the last trading day of the futures contract. After the expiry of a futures contract, final settlement and delivery is made according to the rules laid down by the exchange in the contract specifications document.
2. Contract Size
Contract size, or lot size, is the minimum tradable size of a contract. It is often one unit of the defined contract. For example, current contract size of PMEX sugar contract is 10 Tons. This implies that trading one contract creates a position of 10 tons of sugar. PMEX rice contract has a contract size of 25 tons.
3. Initial Margin
Initial margin is the minimum collateral required by the exchange before a trader is allowed to take a position. Initial margins can be paid in various forms as laid down by the exchange and varies from commodity to commodity as well as from time to time. The level of initial margin is dependent on the price volatility of the contract. More volatile commodities generally have higher margin requirements.
4. Price Quotation
Price Quotation is the units in which the traded price of a contract is displayed. It can be different from the trading size of a contract and is often based on industry practices and conventions. While the contract size of PMEX sugar contract is 10 tons, its price is quoted in Rupees per 100 kgs. PMEX Palm Oil contract has a size of 25 tons but its price quotation follows local trade practices and is displayed as Rupees per maund.
5. Tick Size
Tick Size is the minimum movement allowed by the exchange in Price Quotation. For example, the tick size of PMEX 100gms gold futures contract is Re. 1, whereas it is $0.01 or 1cent for the PMEX 10oz gold futures contract.
6. Tick Value
Tick Value refers to the minimum profit or loss that can arise from holding a position of one contract. Tick value depends on the size of the contract and its tick size. While it is often explicitly mentioned in contract specifications, it can be calculated by the formula:
Tick Value = Contract Size x Tick Size
7. Mark to Market
Mark to market refers to the process by which the exchange calculates and values all open positions according to pre-defined rules and regulations. Mark-to-market is an essential feature of exchange-traded futures contracts whereby the exchange ensures that all profit and losses are recognized by pricing them according to accurate market conditions. It is also an important feature for the risk management of positions of participants.
8. Delivery Date
Delivery date or delivery period refers to the time specified by the exchange during or by which the seller has to make delivery according to contract specifications and regulations. Delivery date is often later than expiry date of a contract, especially in case of physically delivered commodities.
9. Daily Settlement
Daily settlement refers to the process whereby the exchange debits and credits all accounts with daily profits and losses as calculated by the mark-to-market process. Daily settlement is necessary in order to recover losses and pay profits to respective accounts
The above information was drawn from sources believed to be reliable. Although it is believed that information provided is accurate, no guarantee is made. Micro Future Trading assumes no responsibility for any errors or omissions.
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