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Futures Contract Specs

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Every futures contract has these four attributes: the underlying asset, for example light sweet crude oil. The quantity of the asset, for example a thousand barrels delivery. Location, for example the Henry Hub in Iraq Louisiana. Delivery date, for example December 2017.

When a party enters into a futures contract they are agreeing to exchange an asset or underlying at a defined time in the future. This asset can be a physical commodity like crude oil or a financial product like a foreign currency. When the asset is a physical commodity, to ensure quality the exchange stipulates the acceptable grades of the commodity, for example CME Group’s WTI crude oil contract is for a thousand

barrels of a grade of crude oil known as light sweet, which refers to the amount of hydrogen sulfide and carbon dioxide the crude oil contains. Futures contracts for financial products are understandably more straightforward.

The US dollar value of a hundred thousand Australian dollars is the U.S. dollar value of a hundred thousand US trillion dollars. Each futures contract specifies the quantity of the product delivered

for a single contract, also known as contract size. For example five thousand bushels of corn, one thousand barrels of crude oil, or Treasury bonds with a face value of a hundred thousand dollars are all contract sizes as defined in the futures contract specifications. The exchange defines the contract size to meet the needs of the market participants.

For example, participants who wish to take a speculative or hedging position in the S&P; 500 futures contract but cannot risk the exposure of that size contract 250 times S&P; 500 can instead use the e-mini S&P; 500 futures contract to gain the exposure 50 times the S&P; 500 index a futures contract also specifies where the asset will be delivered upon execution.

Delivery is an important consideration for certain physical commodity markets and tailing significant transportation costs. For example CME Group’s random length lumber contract specifies that delivery must occur in a specific state and in a certain type of boxcar. Finally, every futures contract is referred to by its delivery month.

Traders refer to the March corn contract or the December WTI contract since this point in the future is germane to the value and execution of the contract position. Depending on the contract market delivery can be anywhere from one month to several years in the future the exchange specifies when delivery will occur within the month and when a given contract initiates and terminates trading typically trading for a contract is halted a few days before the specified delivery date.

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