Talk:Futures contract

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[edit] Definition

hi, let's try to make the definition as good as possible. There are a few problems with the one as it was (mainly technical, most readers will find these differences irrelevant).

• the buyer - the term buyer implies a transfer of ownership of something already in existence (in this case the contract). In the context of futures it can get very messy. For instance, somone who goes short a contract, is he the seller of a contract? The contract didn't exist before, so how can he sell what didn't exist? Did he issue it himself? Or is he the buyer of a contract which commits him to sell? In the case of securities, if you sell short you do sell something that exists - you sell something that you've borrowed and have promised to give back later. Last but not least, suppose you're short 100 contracts, and buy back 50, i.e. you are the buyer of 50 contracts. That doesn't mean you have to take delivery. Almost all definitions mentioned below avoid the use of the term buyer of a contract.
• confers .. the right and the obligation - this is a good way of explaining the difference between a future and an option, but it seems rather cumbersome. To my knowledge, saying I've just signed a contract which confers upon me the right and the obligation to buy a house, is the same as I've just signed a contract to buy a house.
• underlying security - this only captures very few futures
• delivery date / settlement date etc. Common usage is deliver date & price for futures with physical delivery, final settlement date & price for cash settlement.
• the market price on the delivery date - the market price changes constantly, so there is more than one. Also, the price is fixed on the last trading date, which is always a few days (or weeks) before actual delivery date.

Definitions from the glossaries:

• CBOT: A legally binding agreement, made on the trading floor of a futures exchange, to buy or sell a commodity or financial instrument sometime in the future. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. The only variable is price, which is discovered on an exchange trading floor.
• CME: A standardized agreement, traded on a futures exchange, to buy or sell a commodity at a specified price at a date in the future. Specifies the commodity, quality, quantity, delivery date and delivery point or cash settlement.
• Eurex: A standardized contract for the delivery or receipt of a specific amount of a financial instrument, at a set price, on a certain date in the future.
• CFTC: An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) that may be satisfied by delivery or offset.

Other definitions: [1] DocendoDiscimus 10:35, 3 October 2005 (UTC)

Really need a description of the tick size. I don't understand how it's different from contract size, and the link talks about the old ticker tape machine.

--I see your point...

• somone who goes short a contract, is he the seller of a contract? Yes, a writer or grantor is a "seller". Know first that for every buyer (long) there is a seller (short), with that being said, selling short a futures contract, is betting the market price will fall, thus allowing you to buy back or "close" the position at the lower price. Allowing you to keep the price difference. Hedgers such as farmers use this to protect their crop from price declines. If a farmer is 5 months from harvest and the price of corn currently is 2.25 a bushel, and the farmer predicts their will be a glut of corn by harvest time- more product lowers price- he may want to arrange to sell a quantity of that corn now at 2.25bu to secure his price and protect from the price decline. so..If the farmer sold at 2.25bu, who may have bought it (taken the other side), for example Kellogg’s cereal. They would want to buy it cheap, and secure a quantity of corn now in anticipation of price inclines. both have an agreement, or contract. Agricultural commodities aren’t like buying a house, they can only deliver product at certain times, with weather bugs and disease an ever present threat, their pay check depends on the predetermined price at which a futures contract can be bought or sold.

• description of the tick size -Exchanges establish the minimum amount that the price can fluctuate upward or downward. This minimum fluctuation is known as a "tick". Each futures contract is a different size, quantity, valuation ect, so there is not a standard "tick size" that can be applied to all futures contract as a whole...for example Each "tick" for the grain market (soybeans, corn and wheat) is 0.25 cents per bushel, on each 5,000-bushel futures contract.Hu12 16:11, 24 February 2006 (UTC)

On one 5,000-bushel futures contract... what? Both this quote and the article linked to now cut off at the end =(

Corrected Hu12 18:04, 25 March 2006 (UTC)

[edit] Clarification / Contradiction

Can someone please explain and make more clear the apparent conflict between these two statements:

• In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price

• Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end).

Sounds to me like the "last trading date" would be the day "in the future" that is supposed to have a pre-set price but the second statement leads me to believe the price is not determined until the last trading day. If these statements are accurate, could these mystery dates please be defined more clearly. Otherwise, please clarify what looks like a conflict. --Risce 13:40, 18 July 2006 (UTC)

I think both are attempts at simplification, and in reality its a bit different. With futures, the underlying instrument is not actually bought by the person who buys the future. What is actually exchanged between buyer and seller is, monthly, a cash flow according to the price change of the underlying. Simplified example: Say product 'A' is worth $100 now. I know I want to sell one next year, and I want to know now what I will get for it. I sell a futures contract for it, and it goes for $100. Next month, the spot price of the product has changed to $95. Now what happens is that the person who bought the future pays the difference, 5$, to me. Every month the price difference is exchanged. If the price goes up, the seller pays to the buyer. Now, say, when the future expires the product has become worth $70. In total the buyer will have transferred $30 to the seller of the future. Now, the seller (me, in the example), can sell the product, on the market, for the spot price of $70. Combined with the 30$ the seller has gotten $100 for the product, as was decided in the contract. The buyer of the future could buy the product for $70, and with the 30$ he has paid me it would cost him $100.

No products have to be actually bought or sold, what we really deal with is cash flow based on price changes, which allows people to hedge, or speculate on price changes. Disclaimer: I do not guarantee this is correct, but it is the way I understand it. I hope its clear. S Sepp 14:58, 18 July 2006 (UTC)

well said S Sepp. Both statements are attempts at simplification. Risce, The actual price is not determined until the last trading date. However prior to that date the price fluctuates up and down due to supply/demand..ect. These fluctuations may hold an advantage for speculators or hedgers who wish to "lock" a current price today if they feel the price on the last trading date will be different. Hu12 20:49, 19 July 2006 (UTC)

S Sepp, you stated "The buyer of the future could buy the product for $70, and with the 30$ he has paid me it would cost him $100." Is the buyer not required to buy this product? From the article: "parties of a "futures contract" must exercise the contract (buy or sell) on the settlement date". Thank you for the clarification, but I think someone who understands this very well should write up this example or a similar one in the article. I don't know if an encyclopia is the place to be simplifying things. Perhaps changing "pre-set price" to "pre-set net cost" and explaining the cash flows would be more accurate. --Risce 17:35, 20 July 2006 (UTC)