Investments, tenth edition

  Futures Contracts 

 A     futures  contract    calls for delivery of an asset (or in some cases, its cash value) at a spec-

ified delivery or maturity date for an agreed-upon price, called the futures price, to be paid 

at contract maturity. The  long position  is held by the trader who commits to purchasing the 

asset on the delivery date. The trader who takes the  short position  commits to delivering 

the asset at contract maturity. 

  Figure 2.11  illustrates the listing of the corn futures contract on the Chicago Board of 

Trade for July 17, 2012. Each contract calls for delivery of 5,000 bushels of corn. Each row 

details prices for contracts expiring on various dates. The first row is for the nearest term 

or “front” contract, with maturity in September 2012. The most recent price was $7.95 per 

bushel. (The numbers after the apostrophe denote eighths of a cent.) That price is up $.155 

from yesterday’s close. The next columns show the contract’s opening price as well as the 

high and low price during the trading day. Volume is the number of contracts trading that 

day; open interest is the number of outstanding contracts.  

 The trader holding the long position profits from price increases. Suppose that at con-

tract maturity, corn is selling for $7.97 per bushel. The long position trader who entered 

the contract at the futures price of $7.95 on July 17 would pay the previously agreed-upon 

$7.95 for each bushel of corn, which at contract maturity would be worth $7.97. 

 Because each contract calls for delivery of 5,000 bushels, the profit to the long posi-

tion would equal 5,000  3  ($7.97  2  $7.95)  5  $1,000. Conversely, the short position must 

deliver 5,000 bushels for the previously agreed-upon futures price. The short position’s 

loss equals the long position’s profit. 

 The right to purchase the asset at an agreed-upon price, as opposed to the obligation, 

distinguishes call options from long positions in futures contracts. A futures contract 

 obliges  the long position to purchase the asset at the futures price; the call option, in con-

trast,  conveys the right  to purchase the asset at the exercise price. The purchase will be 

made only if it yields a profit. 

 Clearly, a holder of a call has a better position than the holder of a long position on a 

futures contract with a futures price equal to the option’s exercise price. This advantage, of 

course, comes only at a price. Call options must be purchased; futures contracts are entered 

into without cost. The purchase price of an option is called the  premium.  It represents the com-

pensation the purchaser of the call must pay for the ability to exercise the option only when it 

is profitable to do so. Similarly, the difference between a put option and a short futures posi-

tion is the right, as opposed to the obligation, to sell an asset at an agreed-upon price.     

 Figure 2.11 

Corn futures prices in the Chicago Board of Trade, July 17, 2012  

 Source:  The Wall Street Journal Online,  July 17, 2012.