Futures Contracts Definition and Characteristics

Study Notes

Futures Contracts

Definition

A futures contract is a standardized agreement to buy or sell an underlying asset at a set price on a specific date.
It is a derivatives instrument that derives its value from the underlying asset.

Key Characteristics

Standardization: Futures contracts are standardized, meaning that the terms of the contract, such as the expiration date, contract size, and underlying asset, are predetermined.
Exchange-traded: Futures contracts are traded on an exchange, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
Mark-to-market: Futures contracts are marked-to-market, meaning that the value of the contract is adjusted daily to reflect changes in the underlying asset's price.

Types of Futures Contracts

Commodity futures: Based on physical commodities, such as gold, oil, or agricultural products.
Currency futures: Based on currencies, such as the euro or yen.
Index futures: Based on a particular stock market index, such as the S&P 500.
Interest rate futures: Based on interest rates, such as U.S. Treasury bonds.

Futures Contract Specifications

Contract size: The quantity of the underlying asset that is being traded, e.g., 100 ounces of gold.
Tick size: The minimum price increment, e.g., $0.10 per ounce of gold.
Expiration date: The last day on which the contract can be traded.
Delivery month: The month in which the underlying asset will be delivered, if the contract is not closed out before expiration.

Trading Futures Contracts

Long position: A trader who buys a futures contract to speculate on a price increase.
Short position: A trader who sells a futures contract to speculate on a price decrease.
Margining: Traders must deposit a margin, a percentage of the contract value, to ensure they can meet their obligations.
Leverage: Futures contracts offer high leverage, allowing traders to control large positions with a relatively small amount of capital.

Futures Contracts

Definition

A futures contract is a standardized agreement to buy or sell an underlying asset at a set price on a specific date.
It is a derivatives instrument that derives its value from the underlying asset.

Key Characteristics

Futures contracts are standardized, with predetermined terms such as expiration date, contract size, and underlying asset.
Futures contracts are traded on an exchange, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
Futures contracts are marked-to-market, meaning that the value of the contract is adjusted daily to reflect changes in the underlying asset's price.

Types of Futures Contracts

Commodity futures are based on physical commodities, such as gold, oil, or agricultural products.
Currency futures are based on currencies, such as the euro or yen.
Index futures are based on a particular stock market index, such as the S&P 500.
Interest rate futures are based on interest rates, such as U.S. Treasury bonds.

Futures Contract Specifications

Contract size refers to the quantity of the underlying asset that is being traded, e.g., 100 ounces of gold.
Tick size is the minimum price increment, e.g., $0.10 per ounce of gold.
Expiration date is the last day on which the contract can be traded.
Delivery month is the month in which the underlying asset will be delivered, if the contract is not closed out before expiration.

Trading Futures Contracts

A long position is when a trader buys a futures contract to speculate on a price increase.
A short position is when a trader sells a futures contract to speculate on a price decrease.
Margining involves depositing a margin, a percentage of the contract value, to ensure traders can meet their obligations.
Futures contracts offer high leverage, allowing traders to control large positions with a relatively small amount of capital.

Description

Learn about futures contracts, a standardized agreement to buy or sell an underlying asset at a set price on a specific date. Understand their key characteristics, including standardization and exchange-traded nature.