Top 6 Essential Elements of Futures Contract

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A futures contract is an agreement to trade certain underlying asset such as commodities. There are certain essential elements of the futures contract for it to be legal. It is important to understand these elements of the futures contract.

• Underlying Asset

The underlying asset has to be specified in a futures contract, what type of commodity or another financial instrument, for example, is the underlying asset oil or gold.

• The quality

The quality of the underlying asset has to be specified to avoid the misunderstanding, the underlying assets are priced based on the quality, therefore, the specific quality of the underlying asset has to be specified in the futures contract.

• The size

The amount of underlying asset included in a single contract has to be specified in the futures contract.  

• The Price of Futures

The price of the futures contract has to be specified in each futures contract, the price of a futures contract is specified on the basis of spot price. The currency of the price of futures has to be also specified if it is in USD or GBP.

• The Date of Expiration

The date of expiration is an essential element of the futures contract and it has to be specified. The exact expiry date of a futures contract is the last date that the future contract can be traded. The futures contract is no longer traded after the expiry date and it has to be settle based on the agreement.

• The Availability  

Not all futures contracts are available every month, in a futures contract it is essential to specify the delivery month which is at which months the specific underlying asset is available. For example, the futures contract is available November and March of every year for up to 3 years.

• The Delivery

In a futures contract, the specification of delivery has to be specified accordingly if the delivery will be in physical or cash settlement at the date of maturity. Not all underlying assets are possible to have physical delivery, therefore, they are settled by cash (payment). Most of the underlying assets can be physically delivered such as gold, coffee or oil.