By: Mark Welch, John Robinson and David P. Anderson
There have been organized commodity exchanges in the United States since the Chicago Board of Trade (CBOT) was established in 1848. Other agricultural commodity exchanges today include the Intercontinental Exchange (ICE), Kansas City Board of Trade (KCBT, 1876), and the Chicago Mercantile Exchange (CME, 1919). Nineteenth Century grain traders developed the first exchanges to manage price risk for grain they held in storage. These exchanges and the futures and options tools that have emerged are used today by thousands of farmers and ranchers to manage price risk for the commodities they produce.
Until recently, open outcry pit trading (or floor trading) was the method for trading futures and options. Faster computers and electronic technology have enabled electronic trading to grow in volume. In some cases, like cotton, electronic futures trading has completely replaced open outcry on the floor. In others, like cattle, both methods of trading continue, for now.
Other publications in this series deal with the use of different combinations of cash and futures/options transactions to manage price risk.
To use these tools and strategies correctly, one must understand the specifications of various futures and options contracts.
Contract specifications are the definitions, rules and limits that set the bounds for commodity futures trading. The Commodity Futures Trading Commission (CFTC) reviews the terms and conditions of proposed futures and options contracts. Before an exchange is permitted to trade a futures and options contract in a specific commodity, it must demonstrate that the contract reflects the normal market flow and commercial trading practices in the actual commodity.
Table 1 defines contract specifications for selected futures contracts, and Table 2 covers the specifications for selected options contracts. Table 3 details quality specifications for the most commonly traded agricultural products in the Plains states.
Some of these contracts have the possibility of physical delivery while some are settled for cash. Readers should check with a broker or look at commodity exchange Web sites regularly for information on settlement mechanisms and changes in futures contract specifications.
Download a printer-friendly version of this publication: Specifications of Futures and Options Contracts
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