Whatever type of investment you are considering--including but not
limited to futures contracts--it makes sense to begin by obtaining as
much information as possible about that particular investment. The more
you know in advance, the less likely there will be surprises later on.
Moreover, even among futures contracts, there are important differences
which--because they can affect your investment results--should be taken
into account in making your investment decisions.
The Contract Unit
Delivery-type futures contracts stipulate the specifications of the
commodity to be delivered (such as 5,000 bushels of grain, 40,000 pounds
of livestock, or 100 troy ounces of gold). Foreign currency futures
provide for delivery of a specified number of marks, francs, yen, pounds
or pesos. U.S. Treasury obligation futures are in terms of instruments
having a stated face value (such as $100,000 or $1 million) at maturity.
Futures contracts that call for cash settlement rather than delivery are
based on a given index number times a specified dollar multiple. This is
the case, for example, with stock index futures. Whatever the yardstick,
it's important to know precisely what it is you would be buying or
selling, and the quantity you would be buying or selling.
How Prices are Quoted
Futures prices are usually quoted the same way prices are quoted in the
cash market (where a cash market exists). That is, in dollars, cents,
and sometimes fractions of a cent, per bushel, pound or ounce; also in
dollars, cents and increments of a cent for foreign currencies; and in
points and percentages of a point for financial instruments. Cash
settlement contract prices are quoted in terms of an index number,
usually stated to two decimal points. Be certain you understand the
price quotation system for the particular futures contract you are
Minimum Price Changes
Exchanges establish the minimum amount that the price can fluctuate
upward or downward. This is known as the "tick" For example, each tick
for grain is 0.25 cents per bushel. On a 5,000 bushel futures contract,
that's $12.50. On a gold futures contract, the tick is 10 cents per
ounce, which on a 100 ounce contract is $10. You'll want to familiarize
yourself with the minimum price fluctuation--the tick size--for whatever
futures contracts you plan to trade. And, of course, you'll need to know
how a price change of any given amount will affect the value of the
Daily Price Limits
Exchanges establish daily price limits for trading in futures contracts.
The limits are stated in terms of the previous day's closing price plus
and minus so many cents or dollars per trading unit. Once a futures
price has increased by its daily limit, there can be no trading at any
higher price until the next day of trading. Conversely, once a futures
price has declined by its daily limit, there can be no trading at any
lower price until the next day of trading. Thus, if the daily limit for
a particular grain is currently 10 cents a bushel and the previous day's
settlement price was $3.00, there can not be trading during the current
day at any price below $2.90 or above $3.10. The price is allowed to
increase or decrease by the limit amount each day.
For some contracts, daily price limits are eliminated during the month
in which the contract expires. Because prices can become particularly
volatile during the expiration month (also called the "delivery" or
"spot" month), persons lacking experience in futures trading may wish
to liquidate their positions prior to that time. Or, at the very least,
trade cautiously and with an understanding of the risks which may be
Daily price limits set by the exchanges are subject to change. They can,
for example, be increased once the market price has increased or
decreased by the existing limit for a given number of successive days.
Because of daily price limits, there may be occasions when it is not
possible to liquidate an existing futures position at will. In this
event, possible alternative strategies should be discussed with a broker
Although the average trader is unlikely to ever approach them, exchanges
and the CFTC establish limits on the maximum speculative position that
any one person can have at one time in any one futures contract. The
purpose is to prevent one buyer or seller from being able to exert undue
influence on the price in either the establishment or liquidation of
positions. Position limits are stated in number of contracts or total
units of the commodity.
The easiest way to obtain the types of information just discussed is to
ask your broker or other advisor to provide you with a copy of the
contract specifications for the specific futures contracts you are
thinking about trading. Or you can obtain the information from the
exchange where the contract is traded.
excerpted from Understanding Opportunities and Risks in Futures Trading
Copyright 1986 by National Futures Association
Brought to you by - The 'Lectric Law Library
The Net's Finest Legal Resource For Legal Pros & Laypeople Alike.