Key Features and Specifications

A futures contract is a standardized financial agreement between two parties to buy or sell an asset at a predetermined price on a specific future date. It serves as a risk management tool for hedging against price fluctuations or as a speculative instrument for traders. The key features and specifications of a futures contract are given below.

Underlying Asset

The futures contract specifies the asset to be traded, which can be commodities (e.g., crude oil, gold), financial instruments (e.g., stock indices, government bonds), or even intangible assets (e.g., weather indexes).

Contract Price and Size

The contract price is the agreed-upon price at which the asset will be bought or sold on the contract’s expiration date. The contract size represents the quantity of the underlying asset covered by one contract.

Example: A crude oil futures contract with a contract size of 1,000 barrels and a contract price of $70 per barrel.

Trading Volume

Trading volume refers to the total number of contracts traded within a specific time period, such as a day or a month. High trading volumes indicate active market participation and liquidity.

Open Interest

Open interest represents the total number of outstanding (unresolved) contracts in the market. It helps gauge the overall interest and positions in the futures contract.

Delivery and Limits

For certain futures contracts, physical delivery of the underlying asset occurs upon contract expiration. Additionally, futures exchanges often impose position limits to prevent excessive concentration of contracts by individual traders or entities.