Investments, tenth edition

   The Basics of Futures Contracts 

 The futures contract calls for delivery of a commodity at a specified delivery or maturity 

date, for an agreed-upon price, called the  futures price,  to be paid at contract maturity. The 

contract specifies precise requirements for the commodity. For agricultural commodities, 

the exchange sets allowable grades (e.g., No. 2 hard winter wheat or No. 1 soft red wheat). 

The place or means of delivery of the commodity is specified as well. Delivery of agri-

cultural commodities is made by transfer of warehouse receipts issued by approved ware-

houses. For financial futures, delivery may be made by wire transfer; for index futures, 

delivery may be accomplished by a cash settlement procedure such as those for index 

options. Although the futures contract technically calls for delivery of an asset, delivery 

rarely occurs. Instead, parties to the contract much more commonly close out their posi-

tions before contract maturity, taking gains or losses in cash. 

 Because the futures exchange specifies all the terms of the contract, the traders need 

bargain only over the futures price. The trader taking the  long position  commits to pur-

chasing the commodity on the delivery date. The trader who takes the  short position   com-

mits to delivering the commodity at contract maturity. The trader in the long position is 

said to “buy” a contract; the short-side trader “sells” a contract. The words  buy  and  sell  

     22.1 

The Futures Contract 

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772 

P A R T   V I

  Options, Futures, and Other Derivatives

are figurative only, because a contract is not really bought or sold like a stock or bond; it 

is entered into by mutual agreement. At the time the contract is entered into, no money 

changes hands. 

  Figure 22.1  shows prices for several futures contracts as they appear in  The Wall Street 

Journal.  The boldface heading lists in each case the commodity, the exchange where the 

futures contract is traded, the contract size, and the pricing unit. The first agricultural con-

tract listed is for corn, traded on the Chicago Board of Trade (CBT). (The CBT merged 

with the Chicago Mercantile Exchange in 2007 but, for now, maintains a separate identity.) 

Each contract calls for delivery of 5,000 bushels, and prices in the entry are quoted in cents 

per bushel.  

 The next several rows detail price data for contracts expiring on various dates. The 

March 2013 maturity corn contract, for example, opened during the day at a futures price 

of 720.25 cents per bushel. The highest futures price during the day was 726, the lowest 

was 714.50, and the settlement price (a representative trading price during the last few 

minutes of trading) was 724.25. The settlement price increased by 3.50 cents from the 

previous trading day. Finally, open interest, or the number of outstanding contracts, was 

494,588. Similar information is given for each maturity date. 

 The trader holding the long position, that is, the person who will purchase the good, 

profits from price increases. Suppose that when the contract matures in March, the price 

of corn turns out to be 729.25 cents per bushel. The long-position trader who entered the 

contract at the futures price of 724.25 cents therefore earns a profit of 5 cents per bushel. 

As each contract calls for delivery of 5,000 bushels, the profit to the long position equals 

5,000  3  $.05  5  $250 per contract. Conversely, the short position loses 5 cents per bushel. 

The short position’s loss equals the long position’s gain. 

 To summarize, at maturity: 

Profit to long 5 Spot price at maturity 2 Original futures price

Profit to short 5 Original futures price 2 Spot price at maturity  

 where the spot price is the actual market price of the commodity at the time of the delivery. 

 The futures contract, therefore, is a  zero-sum game,  with losses and gains netting out to 

zero. Every long position is offset by a short position. The aggregate profits to futures trad-

ing, summing over all investors, also must be zero, as is the net exposure to changes in the 

commodity price. For this reason, the establishment of a futures market in a commodity 

should not have a major impact on prices in the spot market for that commodity. 

  Figure 22.2 , panel A is a plot of the profits realized by an investor who enters the long 

side of a futures contract as a function of the price of the asset on the maturity date. Notice 

that profit is zero when the ultimate spot price,  P  

 T 

 , equals the initial futures price,  F  

0

 . 

Profit per unit of the underlying asset rises or falls one-for-one with changes in the final 

spot price. Unlike the payoff of a call option, the payoff of the long futures position can 

be negative: This will be the case if the spot price falls below the original futures price. 

Unlike the holder of a call, who has an  option  to buy, the long futures position trader can-

not simply walk away from the contract. Also unlike options, in the case of futures there is 

no need to distinguish gross payoffs from net profits. This is because the futures contract 

is not purchased; it is simply a contract that is agreed to by two parties. The futures price 

adjusts to make the present value of entering into a new contract equal to zero.  

 The distinction between futures and options is highlighted by comparing panel A of 

 Figure 22.2  to the payoff and profit diagrams for an investor in a call option with exercise 

price,  X,  chosen equal to the futures price  F  

0

  (see panel C). The futures investor is exposed 

to considerable losses if the asset price falls. In contrast, the investor in the call cannot lose 

more than the cost of the option. 

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773

Copper-High 

(CMX)-25,000 Ibs.; $ per Ib.

Jan 3.6580 

3.6760 

3.6520 

3.6645 

20.0065 411

March 3.6725 

3.6965 3.6610  3.6765 

20.0080 103,266

Gold 

(CMX)-100 troy oz.; $ per troy oz.

Feb 1683.80 

1685.80 

1664.20 

1669.90 

216.80 160,918

April 1686.40 

1688.10 1666.40 1672.10 

216.80 149,804

June 1688.10 

1689.60 1669.50 1674.20 

216.80 38,688

Aug 1689.00 

1689.00 

1670.60 

1676.00 

216.80 24,841

Oct 1689.50 

1690.20 

1673.10 

1677.70 

216.90 11,949

Dec 1694.70 

1694.70 

1674.40 

1679.60 

216.90 26,055

miNY Gold (CMX)

-50 troy oz.; $ per troy oz.

Feb 1684.25 

1684.50 

1664.75 

1670.00 

216.70 2,282

April 1683.50 

1684.00 1667.75 1672.00 

216.90 96

June 1684.00 

1684.00 1674.50 1674.25 

216.75 12

Palladium 

(NYM)-50 troy oz.; $ per troy oz.

Feb 718.80 

718.80 

718.70 

726.30 0.50 

4

March 725.20 

728.80 716.60  726.70 0.50 30,654

June 725.55 

729.90 719.20 728.15 0.65  1,480

Platinum 

(NYM)-50 troy oz.; $ per troy oz.

Jan 1681.80 

1681.80 

1674.00 

1682.80 

28.90 47

Feb 1673.00 

1680.40 

1673.00 

1680.80 

28.00 13

Silver 

(CMX)-5,000 troy oz.; $ per troy oz.

Jan 31.735 

31.750 

31.735 

31.695 

20.714 17

March 32.240 

32.245 31.605  31.722 

20.717 78,766

miNY  Silver (CMX)

-2500 troy oz.; $ per troy oz.

March 32.138 

32.438 31.613  31.725 

20.714 295

May 31.863 

31.900 

31.838 31.775 

20.722 11

Sept 32.038 

32.038 

32.038 31.875 

20.717 1

Crude Oil, Light Sweet 

(NYM)-1,000 bbls.; $ per bbl.

March 95.50 

96.68 95.12  95.95 0.72 295,685

April 95.89 

97.16 95.60 96.45 0.70 102,709

May 96.38 

97.58 

96.00 96.90 0.69 86,130

Aug 96.42 

97.57 

96.32 

97.31 0.73 38,272

Sept 96.08 

97.58 

96.07 97.07 0.71 51,513

Oct 96.10 

96.96 

96.04 

96.77 0.69 41,212

Heating Oil No.2 (NYM)

-42,000 gal.; $ per gal.

Feb 3.0795 

3.0958 

3.0693 

3.0864 .0083  46,296

March 3.0674 

3.0848 3.0561  3.0764 .0112  83,625

Gasoline-NY RBOB (NYM)

-42,000 gal.; $ per gal.

Feb 2.8335 

2.8762 

2.8171 

2.8629 .0291  39,099

March 2.8495 

2.8882 2.8316  2.8767 .0278 121,519

Natural Gas 

(NYM)-10,000 MMBtu.; $ per MMBtu.

Feb 3.570 

3.592 

3.441 

3.446 

2.108 47,921

March 3.569 

3.588 3.447  3.454 

2.099 320,563

April 3.597 

3.613 3.482 3.490 

2.091 159,548

May 3.653 

3.667 

3.540 3.549 

2.088 94,821

Oct 3.804 

3.826 

3.703 

3.715 

2.080 104,406

Jan’14 4.218 4.219  4.123  4.135 

2.068 78,522

Agriculture Futures

Corn 

(CBT)-5,000 bu.; cents per bu.

March 720.25 

726.00 714.50  724.25 3.50 494,588

Dec 589.75 

591.00 

583.75 

585.50 

24.75 223,643

Ethanol 

(CBT)-29,000 gal.; $ per gal.

Feb 2.367 

2.383 

2.367 

2.382 .01 1,131

March  2.378 2.397  2.374  2.396 .01 1,605

Oats 

(CBT)-5,000 bu.; cents per bu.

March 360.00 

361.25 355.50  361.00 1.25  7,404

May 365.50 

367.75 

362.75 367.75 ... 2,438

Soybeans 

(CBT)-5,000 bu.; cents per bu.

March 1437.00 

1439.00 1415.00  1435.25 

21.75 226,757

May 1426.75 

1428.25 

1404.50 1423.75 

23.00 140,830

Soybean Meal 

(CBT)-100 tons.; $ per ton.

March 416.50 

417.00 408.00  414.70 

21.80 127,823

MAy 412.10 

412.50 

404.20 410.60 

21.50 56,552

Soybean Oil 

(CBT)-60,000 lbs.; cents per lb.

March 52.04 

52.20 51.50  52.11 .08 

155,915

May 52.40 

52.60 

51.87 52.49 .00 59,010

Rough Rice 

(CBT)-2,000 cwt.; cents per cwt.

March 1530.50 

1537.00 1523.00  1528.50 

22.00 12,472

May 1562.00 

1562.00 

1554.50 1560.50 

22.00 1,490

Wheat 

(CBT)-5,000 bu.; cents per bu.

March 775.50 

775.75 763.00  768.50 

26.25 226.800

July 788.25 

788.75 

777.00 782.25 

26.50 83,615

Wheat 

(KC)-5,000 bu.; cents per bu.

March 819.00 

820.00 816.75  821.50 

28.75 91,904

July n.a. 

n.a. 

835.25 

840.50 

28.00 35,595

Wheat 

(MPLS)-5,000 bu.; cents per bu.

March 860.00 

860.75 852.25  855.50 

25.00 20,338

May 872.25 

872.25 

864.50 867.50 

24.75 9,776

Cattle-Feeder 

(CME)-50,000 lbs.; cents per lb.

Jan 144.425 

145.000 

144.100 

144.600 .400  2,205

March 147.300 

148.575 146.725  147.950 .800 14,972

Cattle-Live 

(CME)-40,000 lbs.; cents per lb.

Feb 126.100 

126.875 

125.625 

125.875 .100 47,761

April 130.650 

131.425 130.175 130.350 

2.100 155,046

Coffee

 (ICE-US)-37,500 lbs.; cents per Ib.

March 150.65 

151.30 146.10  146.55 

23.85 90,658

May 153.75 

154.20 

149.10 149.50 

23.85 29,315

Sugar-World 

(ICE-US)-112,000 lbs.; cents per Ib.

March 18.54 

18.59 18.31  18.49 

2.01 341,806

May 18.59 

18.59 

18.30 18.46 

2.07 167,304

Sugar-Domestic 

(ICE-US)-112,000 lbs.; cents per Ib.

March 21.00 

21.00 20.55  20.88 

2.67 958

May 21.45 

21.45 

21.10 21.23 

2.43 4,057

Cotton 

(ICE-US)-50,000 Ibs.; cents per Ib.

March 80.10 

84.00 80.00  82.89 2.41 132,025

May 80.35 

82.95 

80.15 82.20 1.53 34,978

Orange Juice 

(ICE-US)-15,000 Ibs.; cents per Ib.

March 115.60 

116.80 113.00  113.20 

22.40 14,247

May 116.55 

117.40 

114.30 114.30 

22.20 4,127

Interest Rate Futures

Treasury Bonds

 (CBT)-$100,000; pts 32nds of 100%

March 146-050 

146-150 145-090 145-270 

24.0 548,615

June 144-170 

144-300 143-300 144-120 

24.0 747

Treasury Notes 

(CBT)-$100,000; pts 32nds of 100%

March 132-120 

132-175 131-315 132-075 

22.0 1,865,707

June 131-125 

131-130 131-000 131-060 

22.0 24,269

5 Yr. Treasury Notes 

(CBT)-$100,000; pts 32nds of 100%

March 124-082 

124-102 124-020 124-060 

21.0 1,527,948

June 123-255 

123-267 123-207 123-245 

21.0 3,958

2 Yr. Treasury Notes 

(CBT)-$200,000; pts 32nds of 100%

March 110-077 

110-080 110-070 110-075 ... 

1,007,447

June 110-070 

110-075 110-065 110-067 ... 1,956

30 Day Federal Funds 

(CBT)-$5,00,000; 100-daily avg.

Jan 99.858 

99.858 

99.855 

99.858 ... 

57,169

March ... 

99.875 

99.865 

99,870 ... 

36,813

10 Yr. Int. Rate Swaps 

(CBT)-$100,000; pts 32nds of 100% 

March 118.922 

118.922 118.422  118.609 

2.078 9,349

1 Month Libor 

(CME)

-$3,000,000

; pts of 100%

Feb ... 

... 

... 

99.7975 ... 3,622

Eurodollar 

(CME)-$1,000,000; pts of 100%

Feb 99.7025 

99.7050 

99.7000 

99.7025 .0025  53,143

March 99.7000 

99.7050 99.7000  99.7000 ... 

835,707

June 99.6850 

99.6850 99.6800 99.6800 ... 

706,194

Dec 99.6400 

99.6400 

99.6250 

99.6300 

2.0050 728,161

Currency Futures

Japanese Yen 

(CME)-¥12,500,000; $ per 100¥

March 1.1296 

1.1313 1.1045  1.1119 

2.0163 204,630

June 1.1310 

1.1310 1.1056 1.1127 

2.0164 991

Canadian Dollar 

(CME)-CAD 100,000; $ per CAD

March .9992 

.9997 .9952  .9958 

2.0036 139,041

June .9970 

.9978 .9934 .9938 

2.0036 2,204

British Pound 

(CME)-£62,500; $ per £

March 1.5828 

1.5848 1.5752  1.5787 

2.0049 158,952

June 1.5830 

1.5837 1.5750 1.5781 

2.0049 236

Swiss Franc 

(CME)-CHF 125,000; $ per CHF

March 1.0758 

1.0782 1.0730  1.0779 .0016  40,548

Australian Dollar 

(CME)-AUD 100,000; $ per AUD

March 1.0495 

1.0509 1.0405  1.0433 

2.0074 204,989

June 1.0405 

1.0441 1.0355 1.0366 

2.0073 331

Sept 1.0320 

1.0320 

1.0310 1.0303 

2.0073 1

Mexican Peso 

(CME)-MXN 500,000; $ per 10MXN

March .07830 

.07893 .07820  .07865 .00015  187,352

June .07758 

.07783 .07758 .07798 .00015 

122

Euro 

(CME)-

€125,000; $ per €

March 1.3317 

1.3398 1.3291  1.3378 .0053 216,667

June 1.3329 

1.3400 1.3300 1.3385 .0052  1,777

Euro/Japanese Yen  

(ICE-US)-

€125,000; ¥ per €

March 117.675 

11.6750 11.6750 120.3200 2.2100 

4,186

Euro/British Pound 

(ICE-US)-

€125,000; £ per €

March ... 

... ... 

0.8474 .0060  2,992

Euro/Swiss France 

(ICE-US)-

€125,000; CHF per €

March 1.2376 

1.2445 1.2360  1.2411 .0031  8,588

Index Futures

DJ Industrial Average 

(CBT)-$10 

3 index

March 13706 

13815 13703  13781 62 

10,749

Mini DJ Industrial Average 

(CBT)-$5 

3 index

March 13702 

13818 13701  13781 62 

112,004

S&P 500 Index 

(CME)-$250 

3 index

March 1483.80 

1497.50 1483.30  1491.80 1.50 194,350

June 1482.90 

1491.60 1480.60 1485.10 1.50  4,188

Mini S&P 500 

(CME)-$50 

3 index

March 1483.25 

1497.75 1482.75  1491.75 1.50 

2,972,476

June 1477.25 

1491.25 1476.25 1485.00 1.50 18,475

Mini S&P Midcap 400 

(CME)-$100 

3 index

March 1077.50 

1089.20 1075.70  1086.30 4.70 116,953

Nasdaq 100 

(CME)-$100 

3 index

March 2716.75 

2743.50 2709.75  2718.25 

240.75 10,891

Open

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Metal & Petroleum Futures