Futures Contract

Futures contracts are standardized in delivery specifications as well as in basis asset that is allowed for delivery.

For example, Chicago Board of Trade (CBOT) determines the following requirements for July wheat futures:

• Seller is ready to deliver 5000 bushel of different kinds of wheat: soft red № 2, hard red winter № 2, dark northern spring № 2, northern spring № 1 at a specified price. Moreover the other wheat kinds may be delivered on terms of specified bonus or discount regarding the agreed price. At any rate seller has a right to choose which kind of wheat to deliver.
• Wheat is delivered by means of warrant received from Chicago or Toledo (Ohio) grainery.
• Delivery is met during July and seller chooses a delivery data.
• When the warrant is passed to buyer, he pays a specified price in money terms to seller.

Once the exchange set all the terms of futures contract, except price, it allows selling the contracts. Buyers and sellers (or their representatives) meet at the specified place in the trading hall of the exchange and try to adjust the transaction price. If they manage to do it, one or more contracts are made. All the terms of the contract are standardized and price as a new term is added. Prices are usually set on the basis of the asset unit. Thus, if buyer and seller agree about $4 for a bushel for the contract of 5000 bushel, the total contract price will make $20000.