You can learn everything about trading. This is the fifth chapter of the Beginner Course about Futures
Contract Size.
In this chapter, you will learn about:
- Basic knowledge about Derivatives Contract Size
- How to Calculate the Contract Size
Introduction to Futures Contract Size
When it comes to the futures market, lots
are known as contract sizes. The underlying
asset of one futures contract could be
equity, bond, interest rates, commodity,
index, currency, etc.
Therefore, the contract size varies
depending on the type of contract that is
traded. Contract sizes help standardize
trading on markets, making them more
orderly, transparent, and efficient.
Understanding of The Contract Size
Contract size refers to the deliverable
quantity of a stock, commodity, or other
financial instruments that underline a
futures or options contract.
The size of the contract varies depending
on the commodity or instrument. It also
determines the dollar value of a unit move
in the underlying commodity or
instrument.
Derivatives Contract Size
Derivatives contracts are securities that are
based on the price of some underlying
asset, such as stocks, bonds, commodities,
currencies, and so on.
The amount of the underlying asset
represented in a derivative contract is its
contract size.
Derivatives and other financial instruments
are traded in different ways. A transaction can occur directly between banks themselves in a practice called over-the-counter (OTC) trading.
In an OTC transaction, the buy or sell occurs
between two institutions directly and not
on a regulated exchange.
Example of Contract Size
Contract sizes for commodities and other investments, such as currencies and interest rates, and interest rate futures, can vary widely. For example:
The contract size for a
Canadian dollar futures
contract is C$100,000.
The size of a soybean
contract traded on the
Chicago Board of Trade
is 5,000 bushels.
The size of a gold
futures contract on the
COMEX is 100 ounces.
In listed options markets, the standard
contract size for an equity option is 100
shares of stock. This means that an investor
entitled to buy 100 shares per option
contract (at the strike price, through the
expiration).
On the other hand, the owner put an option
that can sell 100 shares per one contract
held. If investors decide to exercise their
put option, then 10 contracts similarly
represent control of 1,000 shares.
