CONTRACT

Contract is a term of reference describing a unit of trading for a financial or commodity futures. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

In futures trading there are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities (such as single-stock futures), currencies or intangibles such as interest rates and indexes. For information on futures markets in specific underlying commodity markets, follow the links. For a list of tradable commodities futures contracts, see List of traded commodities. See also the futures exchange article.

•	Foreign exchange market
•	Money market
•	Bond market
•	Equity market
•	Soft Commodities market

Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery (also called spot or cash market) or for forward delivery. These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates.

FUTURES CONTRACT

A futures contract is a standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well.

The price is determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.

In many cases, the underlying asset to a futures contract may not be traditional "commodities" at all - that is, for financial futures, the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates.

The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.

A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. In other words, the owner of an options contract may exercise the contract, but both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contract obligations.

CONTRACT SIZE

Contract Size or "unit of trading," is a contract standardized, usually by specifying:

•	The underlying asset or instrument. This could be anything from a barrel of crude oil to a short term interest rate.
•	The type of settlement, either cash settlement or physical settlement.
•	The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.
•	The currency in which the futures contract is quoted.
•	The grade of the deliverable. In the case of bonds, this specifies which bonds can be delivered. In the case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. For example, the NYMEX Light Sweet Crude Oil contract specifies the acceptable sulphur content and API specific gravity, as well as the pricing point -- the location where delivery must be made.
•	The delivery month.
•	The last trading date.
•	Other details such as the commodity tick, the minimum permissible price fluctuation.

CONTRACT SPECIFICATIONS

Futures contract specifications detail all of the trading information that a day trader needs to be able to trade a particular market, such as :

•	Symbol
•	Expiration date
•	Exchange
•	Tick size (also known as the multiplier)
•	Tick value

The symbol, expiration date, and exchange, are used together to identify the exact market and contract that will be traded, and the tick size and value, are used to specify the price movement and profit and loss potential. The contract specifications are also used to configure trading software and charting software, so that they trade the correct market, and display the market's prices correctly.

Contract Expirations

Futures contracts are only valid for a specific length of time, and when the current contract expires, traders must update their trading software and their charting software to use the next contract. Most futures markets use contracts that are valid for 3 months, and have expirations in March, June, September, and December, but there are also futures markets whose contracts expire more often, or at different times. Some popular futures markets that expire at the most common expiration dates are :

•	EUR - The Euro to US Dollar futures market
•	GBP - The British Pound to US Dollar futures market
•	YM - The Dow Jones futures market
•	ES - The S&P 500 futures market
•	ER2 - The Russell 2000 futures market
•	DAX - The DAX futures market

and some popular futures markets that have different expiration dates are :

•	CAC40 - The CAC40 futures market
•	HSI - The Hang Seng futures market
•	ZG - The Gold 100 troy ounce futures market
•	ZI - The Silver 5000 ounce futures market
•	ZC - The Corn futures market
•	ZW - The Wheat futures market

SINGLE OR MULTIPLE CONTRACTS

Futures contracts are the smallest individual units that can be traded (like a single share on a stock market). Beginning day traders usually trade single contracts, whereas experienced day traders may trade multiple contracts at the same time, thereby increasing their trade's profit and loss potential.