A Closer Look at Futures Contracts

Every futures contract will have specification details for the underlying asset. These are known as contract specs and they include; quantity, quality, type, symbol, trading hours, delivery months and daily limits. Details that are unique to specific products are also included in the contract specs.
The example we will be following is the trading of coffee and the grade of coffee bean for example, would be one of the aforementioned unique details of contract.

If you move onto buying an actual futures contract, you’ll see that the contract itself is a thick booklet of paper full of term definitions, specifications and more. To the left is the table of contents for a Robusta Coffee futures from NYMEX.

The last trading day (8) shows when a contract expires. Futures, like options have contract maturities and this day of maturity can be designated by a month or less frequently, a specific date.

The codes for the twelve months is:

Delivery (14) May also be specified using month codes so they really are worth committing to memory.

If you visit the NYMEX website, you’ll find that listed assets come with a product overview. This includes essential information, specifications, supply & demand details, margin requirements and tips on buying.
What traders really see a lot of though, are asset specifications and comparative tables.

As evident in the above table, the symbol of a commodity does not remain the same for one asset. The specific type of coffee here does matter. Many tick symbols are commonly used in all exchanges although sometimes symbols for certain commodities can vary from exchange to exchange.

Another thing to remember is that a commodity can have two symbols; one for floor trading and another for electronic trading. Since most brokers use electronic trading when they can for the sheer convenience of it, they rarely encounter the former. The two ticker system lies at the very core of CME’s electronic trading. A list of widely used ticker symbols is available here.

The margins that traders must post to protect the clearing house vary, but are generally around 10-15%. This trend is also evident above.

Trade Example

If a buyer (long position holder) purchases the above contract; 37,500 pounds of coffee (KT) at 150 cents/pound, he will have automatically hedged himself $56,250 worth of coffee. With a 13% margin, the margin deposit works out to be $7312. The buyer does not need to pay the whole sum until the contract delivery/expiry date.

Whether the goods are delivered as beans or ground coffee should be specified in the contract and this information is only useful to hedgers.

What long speculators want is for the coffee prices to increase. Then he can sell the futures (take the short position) and instantly realise profit because futures assets are marked to margin at the end of every day. For example, if the value of coffee rises to 175 cents/pound, the seller would make a $9375 profit (0.25 x 37500). This is higher than his investment, which by the way, is returned once he cancels out his long position by taking a short one.