What is contract specifications- Equity Derivative

Contract Specifications Futures

When two parties enter into an agreement for buying a specific asset and its quantity for a fixed future date at a fixed price, it is known as the futures contract.

When entering into an agreement, the two parties need to specify the contract and all the key points that should be present in the contract; It is called the Contract specifications futures. There is a need to consider the delivery place and specific time, including all the relevant costs involved.

In futures contracts, the contract specifications futures can be for the next couple of months or for a future year.

The early investors who want to invest in futures contracts for a certain period need to understand the future contract specifications.

The contract specifications futures include the following,

1. Expiry Date:

Expiry Date, also popularly known as Expiration, is when the future contract between two parties expires or is terminated. Expiry signifies that the contract rules and terms by exchange have been successfully followed by both the parties involved.

2. Size of the Contract or Contract Size:

The size of the contract is mentioned as a single unit. For example, there are 100 cartons, all having 10-kilo mangoes in each box. So, in the contract, 1000 Kgs or 1 ton will be mentioned as a single unit. So that is the overall size of the contract.

3. Initial Margin:

Initial Margin among contract specifications in stock market is some percentage that needs to be paid or submitted in the form of collateral or cash. Initial Margin is needed to be settled between the defaulter and surviving party to get protection against future losses. According to the Federal regulations, the requirement of Initial Margin is 50% of the purchase price of the security.

4. Price Quotation:

The price that is fixed between parties of a future contract is known as price quotation in specifications of a futures contract. The word "quotation" or "quote" would be used for price quotation and mention the traded price of the contract. The price will be mentioned in Indian Rupees as per the trade practices adopted locally. Let us take the same example of Cartons of Mangos. The mangoes had 1 ton or 1000 kgs now the price quotation mentioned will be, let's say, 50 kgs only. So it would depend upon how the price quotation is considered.

5. Tick Size:

In Price Quotation, the exchange allows minimum movement of a certain amount in the Price Quotation is called Tick Size in contract specifications in stock market.

Let's say the stock's LTP ( Last Traded Price) is Rs.50, and here the tick size is 0.03. Then the bidding will be around 49.97, 49.94, 49.91, and it will go on like that.

6. Tick Value:

The minimum losses or profits of one contract are known as tick value. Tick value has to rely on the tick size and the size of the contract. It will be mentioned in the specifications of a futures contract. It is calculated by multiplying the contract size by Tick size.

7. MTM or Mark To Mark:

MTM in specifications of a futures contract is helpful in accounting for fair value. The fair value considered here is of assets and liabilities according to the market price and conditions.

8. Delivery Date:

Delivery Date in contract specifications in stock market is the specific date at which the final delivery occurs as specified in the contract. Usually, the delivery date is after the contract expires on the expiry date.

9. Daily Settlement:

With the MTM process, the exchange calculates the daily profit and losses of all credit and debit accounts which are known as Daily Settlement.

The above contract specifications in stock market are essential. Other points are considered in the specifications of a futures contract.

Options contract specifications

Like the future contract specifications, there are options contract specifications that one must know about to get an idea about what needs to be included.

1. Underlying stock:

Underlying stock includes the number of shares of stock to be traded. It is vital to include the options contract specifications because it shows the specific details about the stock the traders are trading.

2. Expiry Date:

The expiry date in options contract specifications shows when the contract is going to expire. Some contracts have monthly expiry dates, and option contracts have weekly expiry dates.

3. Strike Price:

Strike Price in specifications of an options contract is the certain fixed price in the future at which the transaction stocks will occur. If the stock's current price is different and the strike price is determined, the buyers and sellers agree to do a transaction as per the strike price.

4. Call/Put Contact :

The option buyer can buy a call contract which means he has the needed rights but not the obligation to buy the numbers of shares of company stock before the expiry date in the future at the pre-fixed strike price.

5. Debit/Credit Price

The buyers and sellers agree to a price that is the debit or credit price for options contracts. In contract specification for options, there is a need to show the premium paid or the price and debit/credit prices that the buyers and seller agree to initiate at the time of the options contract.

Summary

The specification for options and futures makes it easier to understand the key points included in the future or options contract. The above points are essential when the investors need to do options trading or futures trading.