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Elements of a Futures Contract

September 20, 2017 by Daniels Trading| Futures 101

Before entering the world of futures trading, investors must take the time to understand how contracts in the sector work and how they differ from trading in other, more mainstream asset classes, such as stocks and bonds.

Let’s begin with a simple definition of a futures contract. The contract legally obligates a buyer to acquire an asset, or a seller to sell an underlying asset, at a predetermined date and price in the future. The asset involved can be anything from physical commodities — gold, oil, corn, etc. — to financial instruments, such as stock indices, interest rates and currencies.

Now before entering into a futures contract — known as taking a position — an investor should be aware of the four main elements of a futures contract. These instruments are much different from buying shares in companies on stock exchanges. In that type of trade, an investor immediately takes ownership of the underlying asset.

The four elements in a futures contract are:

Asset Class

The contract will specify the asset that underlies the contract, which is crucial in measuring the value of the trade. Some of the most highly traded assets in futures trading include energy products, agricultural commodities, precious metals, equities indices, and forex.

Quantity

The quantity explains the size of the contract, which typically outlines the specific number of the units being bought or sold. For example, one contract in WTI crude oil futures gives the holder the right to acquire 1,000 barrels of oil. If trading gold futures, one contract would give a market player the right to buy 100 troy ounces of gold.

Expiration

Futures contracts must have an end date — an expiration on a set day in the future. The expiry date is the final day the contract can be traded. After that date, the contract must be settled under the terms of the agreement.

Price

The price of a contract is ultimately determined by the open market, reflecting the value of the asset involved. A futures contract, however, will contain a specific price, usually tied to the spot or cash price of the underlying commodity. The contract will also make clear what currency is being used in the contract, such as whether the asset is priced in U.S. dollars or another denomination.

Other Considerations

There are details involved in futures contracts, including delivery terms. Although most futures contracts are closed out before expiration, it’s still important to know the contract’s delivery terms. This involves knowing whether delivery will be in the physical commodity or will involve a cash settlement. Trading in gold, soybeans or oil often means a physical delivery, while other instruments, such as contracts based on S&P 500 Futures, are settled in cash.

Another key factor about futures contracts is that they are standardized, so they can be traded on exchanges, such as the exchanges owned by the CME Group, Chicago Board Options Exchange, or the Intercontinental Exchange. The Commodity Futures Trading Commission regulates the trading of futures contracts in the United States.

Conclusion

If you’re considering investing in futures, you should understand the intricacies of futures contracts and whether such investments fit the risk profile of the investor. To fully understand the pros and cons of investing in futures, investors should consult a qualified broker, such as Daniels Trading. If you’re ready to speak with a licensed futures broker, schedule your consultation now!

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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