Question

What is a futures contract? Why are futures contracts considered standardised?

Hint:

Standardisation in futures contracts ensures uniformity, making them easily tradable and reducing uncertainty for market participants.

Answer 1

Futures Contract: A futures contract is a legally binding agreement between two parties to buy or sell a specified quantity of an asset (such as commodities, stocks, or currencies) at a predetermined price on a specific future date. These contracts are traded on organized exchanges and are used for hedging or speculation. Why are Futures Contracts Considered Standardised? Futures contracts are standardised because they have fixed and uniform terms set by the exchange, which include:

Contract Size: The quantity of the underlying asset covered by one futures contract is fixed.
Quality Specifications: The grade or quality of the underlying asset is predefined.
Delivery Date: The specific date or month when the contract expires and delivery or settlement occurs is predetermined.
Price Quotation: The method for quoting prices and minimum price fluctuations (tick size) are set.
Trading Hours and Procedures: Standardised trading rules and mechanisms apply across all contracts.
Standardisation facilitates liquidity, ease of trading, and ensures transparency and fairness in the futures market by allowing contracts to be easily bought and sold without negotiation on contract terms.