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Home / Education / Futures & Options 101 / Futures Contract

Futures Contract

A futures contract is an agreement to buy or sell a commodity at a date in the future. Everything about a futures contract is standardized except its price. All of the terms under which the commodity, service or financial instrument is to be transferred are established before active trading begins, so neither side is hampered by ambiguity. The price for a futures contract is what’s determined in the trading pit or on the electronic trading system of a futures exchange.

What’s Already Determined?

  • Quantity
  • Quality
  • Delivery date
  • Delivery point or cash settlement

Random Length Lumber

Take the Random Length Lumber futures contract which trades at Chicago Mercantile Exchange (CME) as an example.  The contract quantity is already determined (110,000 board feet).  So is the quality of the lumber (grade stamped Construction and Standard, Standard and Better, or #1 or#2 2X4’s of random lengths from 8 feet to 20 feet).

The delivery date of the contract is already decided, too.  That’s when the contract matures.There are six different Lumber futures contracts traded each year, each with a specified delivery date – January, March, May, July, September and November.  So when you buy a March Lumber contract, you know the contract matures in March.

The delivery points for Random Length futures contracts are also known.  That means if you make or take delivery of one Lumber contract (equivalent to 110,000 board feet of Lumber) when the delivery date arrives, you know exactly to which warehouses you can send your truck.  (For many commodities, there’s a cash settlement instead of delivery of the actual commodity.)

Here’s an interesting point to remember.  Most people who buy and sell Random Length Lumber futures don’t deliver or pick up a load of lumber when the contract matures.  They usually offset the trade and get out of the market before that point.  They don’t really want the lumber.  They’ve traded the futures contracts for other reasons, such as protection against rising or falling lumber prices or simply to earn a profit on the trade.

How much for Random Length Lumber?
A Lumber futures contract trading at 388.70 means $388.70 per thousand board feet, or $42,757.00 for the whole contract.

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Contents Courtesy of CME Group.

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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.

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