Every futures contract has an underlying asset, the quantity of the asset, delivery location, and delivery date.
For example, if the underlying asset is light sweet crude oil, the quantity is 1,000 barrels, the delivery location is the Henry Hub in Erath, Louisiana and the delivery date is December 2017.
When a party enters into a futures contract, they are agreeing to exchange an asset, or underlying, at a defined time in the future. This asset can be a physical commodity like crude oil, or a financial product like a foreign currency.
When the asset is a physical commodity, to ensure quality, the exchange stipulates the acceptable grades of the commodity.
For example, WTI Crude Oil contracts at CME Group is for 1,000 barrels of a grade of crude oil known as “light, sweet” which refers to the amount of hydrogen sulfide and carbon dioxide the crude oil contains.
Futures contracts for financial products are understandably more straightforward: the U.S. dollar value of 100,000 Australian dollars is the U.S. dollar value of 100,000 Australian dollars.
Each futures contract specifies is the quantity of the product delivered for a single contract, also known as contract size. For example: 5,000 bushels of corn, 1,000 barrels of crude oil or Treasury bonds with a face value of $100,000 are all contract sizes as defined in the futures contract specification.
The exchange defines the contract size to meet the needs of market participants. For example, participants who wish to take a speculative or hedging position in the S&P 500 futures contract but cannot risk the exposure of that size contract ($250 x the S&P 500) can instead use the E-mini S&P 500 futures contract to gain that exposure ($50 x the S&P 500 Index).
A futures contract also specifies where the asset will be delivered upon execution. Delivery is an important consideration for certain physical commodity markets entailing significant transportation costs. For example, the random-length lumber contract at CME Group specifies that delivery must occur in a specific state and in a certain type of boxcar.
Finally, every futures contract is referred to by its delivery month. Traders refer to the March Corn contract or the December WTI contract since this point in the future is germane to the value and execution of the contract position. Depending on the contract market, delivery can be anywhere from one month to several years in the future. The exchange specifies when delivery will occur within the month and when a given contract initiates and terminates trading. Typically, trading for a contract is halted a few days before the specified delivery date.