Specifications

A futures contract is an agreement between two parties for a delivery of an asset in the future. Since these contracts are freely traded in the exchange, both in a primary and secondary market sense, there must be strict guidelines specifying the nature of these agreements. One of the most important responsibilities of the exchange is to set these guidelines. When alternatives are offered, it is the party with the short position -that is to say the seller, that will choose between them. The factors that are specified include

• The asset. The exchange specifies bounds of quality that is accepted.

• Contract size. The amount of the asset delivered under one contract.

• Delivery arrangements. Futures are quoted using the delivery month, therefore the exchange usually sets a subperiod of this month as the delivery period. The short party will choose the exact date.

• Price quotes. The way that the futures prices are quoted. For example the T-Note futures are quoted as dollars and 32s of a dollar. This will also define the minimum price movements, the tick, in this case $1/32.

• Limit up/down. When the price of the future reaches the limit, trading stops. These are imposed in order to prevent speculative attacks in the futures markets. However, when the price of the underlying declines rapidly, these limits become artificial barriers and distort the market efficiency.

• Position limits. The maximum number of contracts that the agent is allowed to hold. These include the total number of contracts that can be held and the maximum number of contracts expiring in any particular month. These help not only preventing speculative attacks in the futures market, they help preventing attacks in the market of the underlying asset as well.