Contract Specifications
As opposed to the forward contract, futures are standardized contracts as they are traded at the organized exchanges. As standard contracts, they are subject to the terms and conditions. As such, in order to be the well informed investors, every market participant in futures must know the following contract specifications.
1. Underlying Instrument
Every futures contract must have its underlying instrument, which is basically the physical instrument traded in the cash market. This is justified because the price of futures contract is based on the actual price of physical instrument. Therefore by definition every futures market must have the cash market.
2. Grade or Quality
For physical commodity, the grade or quality of the underlying instrument is specified in futures contracts to ensure that every participant is trading on the same type and quality of underlying instrument. By comparison, commodity futures are graded on the technical requirements of physical commodity as the underlying instrument, while financial futures are graded on the quality of the physical instrument.
3. Price Quotations
Like the cash market, futures prices are quoted in the same basic units of its underlying instrument.
4. Contract Size
The contract size refers to the number of units or amount that is covered by futures contract.
5. Contract Month
Unlike cash market, futures contract is traded on the basis of specified contract month, which is simply the month of maturity or expiry. This justified because every futures market must have the spot or current month and future or forward months.
7. Expiry Date
As noted earlier, every contract must come to an end, which is simply the date of expiry or maturity. As such, the expiry date is the last day of trading in the particular contract month, and hence, futures contract ceases to exist after the expiry date.
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