Definition, Examples, Pros & Cons

What Is Contract Size?

The period of time contract size refers to the deliverable quantity of a stock, commodity, or financial device that underlies a futures or possible choices contract. It is a standardized amount that tells patrons the suitable quantities which may also be being bought or introduced in line with the words of the contract. Contract sizes are incessantly standardized by means of exchanges and vary depending on the commodity or device. Moreover they unravel the buck price of a unit switch or a tick size throughout the underlying commodity or device.

Working out Contract Size

Derivatives are financial contracts which may also be in line with the price of some underlying asset. The ones assets can include on the other hand are not limited to stocks, bonds, commodities, and currencies. They are traded in a large number of ways. For example, a derivative transaction can occur instantly between banks in a convention known as over-the-counter (OTC) purchasing and promoting rather than through a regulated exchange.

Financial gear can be traded on a regulated exchange. ​To be in agreement facilitate trades, futures or possible choices exchanges standardize contracts, which incessantly reduces costs and improves purchasing and promoting efficiencies. Standardizing comes through expiration dates, provide methods, and contract sizes. Specifying contract size is an important part of this process.

The contract size is the volume of the underlying asset that is represented in a derivative contract. It is among the most vital choices of a futures contract. This is as it’s serving to unravel which avid gamers can get entry to {the marketplace}. As such, upper contract sizes most often denote participation by means of upper, institutional buyers. Contracts which may also be smaller in size are additional accessible for any type of investor.

For example, the Chicago Mercantile Industry (CME) presented the standard-sized S&P 500 futures contracts in 1982. The contract size ($250 cases the cost of the index) used to be as soon as most often accessible to institutional buyers. In 1997, the exchange presented a smaller style known as the E-mini, which used to be as soon as one-fifth the dimensions of the normal contract. This allowed retail buyers get entry to to these contracts. (Phrase that the exchange delisted the normal S&P 500 index futures and possible choices contracts in September 2021.)

Advantages and Disadvantages of Contract Sizes

The fact that contracts are standardized to specify contract size is usually a benefit along with a disadvantage for patrons. We’ve listed probably the most most common pros and cons underneath.

Advantages

Standardizing contract sizes makes the purchasing and promoting process additional streamlined and promises that contracts are in step with others to be had out there. For example, all oil futures contracts include 1,000 barrels of crude. As such, the dimensions of one contract does no longer vary from any other.

The contract size moreover helps provide an explanation for the duties of patrons. For example, if a farmer sells 3 soybean contracts, it is understood that provide comes to fifteen,000 bushels (3 x 5,000 bushels), which can be paid inside of the true buck amount that is specified by the contract size.

Disadvantages

An obstacle of the standardized contract is that it cannot be amended or modified. So, if a foods producer needs 7,000 bushels of soybeans, their variety is to each acquire one contract for 5,000 (leaving 2,000 fast) or acquire two contracts for 10,000 bushels (leaving a surplus of 3,000).

Examples of Contract Size

Contract sizes for commodities and other investments, very similar to currencies and interest rate futures, can vary widely. For example:

• A Canadian buck futures contract is C$100,000
• A soybean contract traded on the Chicago Board of Industry is 5,000 bushels
• A gold futures contract on the COMEX is 100 oz.

So in the case of the gold contract, each and every $1 switch in the price of gold translates proper right into a $100 change throughout the price of the gold futures contract.

Listed Possible choices Markets

The standard contract size for an equity chance is 100 shares of stock. This means if an investor workout routines a decision chance to buy the stock, they are entitled to buy 100 shares in keeping with chance contract at the strike price right through the expiration. An owner of a put chance, on the other hand, can advertise 100 shares in keeping with one contract held within the match that they decide to exercise their put chance. Thus, 10 contracts in a similar way represent regulate of 1,000 shares.

E-Minis

E-minis are a class of electronically traded futures contracts whose contract size is a fraction of the corresponding not unusual futures contract. E-minis are predominantly traded on the CME and are available on:

• Indexes: Nasdaq 100, S&P 500, S&P MidCap 400, and Russell 2000
• Commodities: Gold, oil, wheat, soybeans, corn, natural fuel
• Currencies: Euro

Let’s check out the E-mini S&P 500. Its contract size is one-fifth that of the normal S&P 500 futures contract, which used to be as soon as delisted in September 2021. This smaller contract size shall we in retail patrons and buyers to take part to be had out there—not merely institutional buyers.