Contract Specifications on Derivatives Exchanges

What are Derivatives Exchanges?

Regulated entities that provide a physical or electronic marketplace for the trading of derivatives i.e. futures and options.

What are the advantages of having Derivatives Exchanges?

• They concentrate liquidity and lead to more accurate price discovery
• Trading costs are reduced, especially in terms of bid and offer spreads

What are the key components of contract specifications?

• Contract Size – a physical volume or an index level times a monetary multiplier
• Tick Size – Minimum allowable fluctuation in the contract price
• Tick Value – The change in the value of the contract for a one tick price change and how it’s used in the calculation of profits and losses
• Delivery months – The months in which contracts ‘expire’, usually March (H), June (U), Sep (M) and Dec (Z)
• Last trading day – The specific time that the contract ceases trading. Most will be on a particular day and time in the delivery month e.g. third Friday. There are some exceptions
• Delivery and Settlement – Whilst most contracts are closed out prior to delivery, those that are still open on expiry have to comply with the obligations undertaken in the contract. Delivery and settlement take place shortly after the contract expires. and is usually dictated by  spot market conventions. For example Government Bond futures settle T+1 after expiry, equity options settle T+3 after exercise. In some Bond contracts delivery can be initiated before the contract expiry date. E.g .US T-Bond and UK Long Gilt futures contracts
• Settlement methods – Physical  delivery of the underlying asset, cash settlement (an exchange of funds represented by the change in the contract value), an assignment of a long or short futures position in the nearest delivery month (for options contracts that are designated as options on futures)