3.1.3 Futures Markets

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3. Futures Markets

3.1 Futures of a Features Contract

3.1.1 Key Features of a Futures Contract

Underlying asset: financial assets and commodities

Contract size: setting a suitable size to attract both retail investors and large corporations.

Treasury bond futures has a face value of $ $100, 000$ .
S&P $500$ futures contract has a multiplier of $250 X$ .

Delivery location: for some contracts, the delivery location may factor into the price of the underlying asset.

Delivery time: exchanges determine the delivery month for which a contract trades, the time when a contract starts trading, and the time when it finishes trading.

The party with the short position can choose among the delivery dates specified by the exchange.

Price quotes: minimum price movements for each contract.

Price limit: exchanges set limits on how much a futures price can move in one day.

The purpose of price limits is to prevent large price movements resulting from speculation. If the price during a day moves up or down by the price limit, trading is normally halted for the day. Meanwhile, price limits may be changed from time to time.

However, there price restrictions may also hamper the determination of true market prices if limit moves arise from new information reaching the market.

Position limits: a limit on the size of a position that a speculator can hold.

Prevent speculators from exercising an unreasonable influence on the market.

Position limits are often in the tens of thousands of contracts and do not affect most traders.

Open interest: The number of contracts in existence at any time, also as the number of long positions, or, equivalently, the number of short position.

when both members are taking new positions, the open interest increases by one.
when one member is closing out a position while the other is taking a new position, the open interest remains the same.
When both members are closing out their respective position, the open interest decreases by one.

Trading volume: the number of contracts traded in a day.

If many traders close their positions, the volume of the day may be greater than the open interest. It can also happen if there is a large amount of intraday trade.

3.1.2 Delivery Mechanics

Physical delivery: at the end of the contract, the long position holder will take delivery and the short will deliver the physical commodity.

Cash settlement: at the end of the contract, net cash position would be solved by money.

3.1.3 Placing Orders

Traders of futures and other securities can place many different types of orders.

Market order is a request to buy or sell futures (i.e., take a long or short position) as quickly as possible at the best available price.

Limit order is that the trader specifies a price limit. A limit order can only be executed at the specified price or at a price more favorable to the trader.

Stop/Stop-Loss order is the order that becomes a market order once the asset reaches a specified or a less favorable price. Stop-loss orders (as the name implies) are orders that are designed to limit a trader’s loss on a certain position.

Stop-Limit order becomes a limit order when the stop price is reached. Two prices must be specified: the stop price and limit price.

Market-if-Touched(MIT) order is an order that becomes a market order if a trade occurs at the specified price or a more favorable price.

Discretionay order is an order that the broker can delay filling in hopes of getting a better price.

Fill-or Kill order is an order that must be executed immediately on receipt or not at all.