Contracts calling for the future delivery of products are common in all lines of business. The term futures trading is, however, ordinarily applied only to a special type of contract, bought and sold according to the rules of organized commodity exchanges.
A futures contract is an agreement between two parties—one who agrees to sell and deliver and one who agrees to buy and receive (1) a certain kind and quantity of a commodity, (2) at some specified future time, (3) at a specified price, and (4) according to the conditions of trading prescribed by an organized commodity exchange or conditions generally understood in the trade. Payment and delivery are postponed to a future time, for the goods may not even be in existence at the time of the contract, as is the case of many grain contracts made before the commodity has actually been harvested.
A futures contract is an agreement to buy or to sell and not a consummated purchase or sale. Such contracts, regardless of the specific commodity involved, generally have certain prescribed characteristics that have been established for the purpose of simplifying the trading activity. First, all contracts involve a standard quantity unit of the commodity or some multiple thereof. Thus, in wheat futures, trading is in terms of "round lots" of 5,000 bushels. Similarly defined standard units are recognized for other commodities. Second, trading is ordinarily confined to a single so-called contract grade or to a few such grades specified for this purpose. The assumption is that prices of grades other than those recognized for trading purposes will fluctuate in the same manner as contract grades. It is, accordingly, not necessary to establish machinery for trading in all recognized grades of a commodity. Third, delivery of the commodity must be made during a specified month. Futures trading does not involve specific delivery dates; rather, the seller has the option as to the day of the specified month that he will make delivery. Fourth, the seller has the option of delivering certain stipulated grades higher or lower than the contract grade, at a specified premium on or discount from the contract grade as the case may be. Fifth, the commodity to be delivered on the contract must be weighed and graded by licensed inspectors. Finally, delivery must be made from approved warehouses. These characteristics constitute elements of standardization in exchange, which are well understood by those engaged in futures trading. Because of their existence and widespread acceptance, such contracts may be effected speedily and without delay in accordance with rigidly maintained, equitable principles of trade.
Even though considerable attention is devoted to the terms of delivery in the foregoing discussion, such contracts seldom involve actual physical delivery of the commodity from seller to buyer.
No comments:
Post a Comment