The term “contract unit” refers to the amount of the underlying asset represented by a single derivative contract. Depending on the type of contract, the underlying asset can be anything traded on the exchange from derivatives, agricultural commodities and metals to currencies and interest rates. Different futures contracts may have different contract units, even if they belong to the same asset class. For example, a CAD/USD futures contract traded on the Chicago Mercantile Exchange (CME) has a contract size of $100,000, while an e-mini contract also traded on the CME has a size of $10,000. Subscribe to America`s largest dictionary and get thousands of additional definitions and advanced search – ad-free! What prompted you to consult the bargaining unit? Please let us know where you read or heard it (including the quote if possible). Because futures contracts are highly standardized, the contract unit indicates the exact amount and specifications of the asset.B, such as the number and quality of barrels of oil or the quantity of foreign currency. In stock options, for example, each contract is equivalent to 100 shares. One of the key elements of any derivative contract is its contractual unit. This critical clause encompasses the quantity and type of commodities traded for each derivative contract.
For example, if someone buys a corn futures contract, they actually buy 5,000 bushels of corn, while when someone buys an oil contract, they buy 1,000 barrels of oil. Gold futures, on the other hand, have a contract unit of 100 troy ounces. 6. `industrial unit` means a unit of goods which, for commercial purposes, is a single whole for the purposes of sale and division which appreciably affects its character or value on the market or in use; A business unit may be a single item (in machine form) or a set of items (in the form of furniture or face) or a quantity (in the form of a bale, crude oil or wagon) or any other unit treated as a single assembly in use or on the relevant market. “Bargaining Unit” Merriam-Webster.com Legal Dictionary, Merriam-Webster, www.merriam-webster.com/legal/bargaining%20unit. Accessed December 3, 2020. Investors should understand the conventions of the exchange on which they wish to trade. Otherwise, they could inadvertently expose themselves to a transaction whose value is much greater or lower than they expected.
It is imperative that all those who buy or sell futures contracts are aware of these differences and do not assume that the monetary unit will be the same in all areas. If the unit is too large, many investors and traders who want to hedge smaller exposures will not be able to use the exchange. Similarly, if the contract unit is too small, trading becomes expensive because there are costs associated with each contract traded. To solve this problem, some exchanges have introduced the concept of “mini” contracts to attract and hold smaller investors. By facilitating the participation of these retail investors in derivatives markets, exchanges hope to increase the overall liquidity of the market, which will benefit all investors. The size of the contract varies depending on the goods or instrument. It also determines the dollar value of a unit movement in the underlying product or instrument. Commodities and financial instruments are traded in different ways.
A transaction can take place between the banks themselves in a practice called over-the-counter (OTC) trading. In an over-the-counter transaction, the purchase or sale between two institutions takes place directly and not on a regulated exchange. Commodities and financial instruments can also be traded on a regulated exchange. To facilitate trading, futures or options exchanges standardize contracts in terms of expiration dates, delivery methods, and contract sizes. Contract standardization reduces costs and improves transaction efficiency. Specifying the size of the contract is an important part of this process. (4) An undivided proportion of an identified mass of fungible products is sufficiently identified to be sold, although the quantity of mass is not determined. Any agreed share of this mass, or a quantity thereof, agreed by number, weight or other measure, may be sold to the Buyer to the extent of the Seller`s interest in the estate, which will then become co-owner. Derivatives markets have become an increasingly important part of the global economy. They enable industrial customers to efficiently source large quantities of raw materials via a single centralised market. This has the advantage of reducing transaction costs, increasing transaction fees and reducing counterparty risk through clearing houses and other systems. Financial buyers also actively participate in derivatives markets, e.B to speculate on commodity prices or to hedge risk.
The fact that contracts are standardized to indicate the size of the contract is both good and bad. One advantage is that traders are aware of their obligations. For example, if a farmer sells three soybean contracts, it is understood that the delivery includes 15,000 bushels (2 x 5,000 bushels) paid for exactly in dollars indicated by the size of the contact. By using this website, you agree to security monitoring and auditing. For security reasons and to ensure that the public service remains accessible to users, this government computer system uses network traffic monitoring programs to identify unauthorized attempts to upload or modify information, or otherwise cause damage, including attempts to deny service to users. A disadvantage of the standardized contract is that it cannot be modified. The size of the contract cannot be changed. So, if a food producer needs 7,000 bushels of soybeans, their choice is either to buy a contract for 5,000 (leaving 2,000 empty) or to buy two contracts for 10,000 bushels (leaving a surplus of 3,000). It is not possible to change the size of the contract as in the OTC market.
In the OTC market, the amount of products traded is much more flexible because contracts, including size, are not standardized. The acquisition shall be full or phased if the conditions set out in the storage unit agreement are met. .