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The Development of Contract Specifications

CME Group , CME Group

Published 10/02/2008 - 3:19 a.m. EST

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ABOUT THE AUTHOR

CME Group

Website:
http://www.cmegroup.com

How are Futures Cont ract Specifications Determined?

Much research is done before a futures contract is introduced or an existing one is modified to ensure the contract will coincide with current industry practices and norms. Industry experts and contract users are consulted, along with academic experts and other experts like government graders.

The terms and conditions of a futures contract are set to encompass the mainstream of the commodity in the marketplace so futures prices and major cash market values converge when the futures expire. Convergence enables sellers of futures to easily find product to deliver when futures prices are high relative to cash prices, and also enables buyers of futures to easily find an outlet for the product they might receive on delivery, making them comfortable to “stand for delivery” when futures prices are low
relative to cash prices. All of that makes futures prices reflective of the main cash markets. A stable and predictable basis (cash – futures difference) exists for most hedgers results, so they find it conducive to use the contract.

Details: The Development of Contract Specifications

Video: CME Group Commodity Product Overview

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