Editing Futures exchange (section)

==Nature of contracts==
{{Further|Futures contract}}
Exchange-traded contracts are standardized by the exchanges where they trade. The contract details what asset is to be bought or sold, and how, when, where and in what quantity it is to be delivered. The terms also specify the currency in which the contract will trade, minimum tick value, and the last trading day and expiry or [[delivery month]]. Standardized commodity futures contracts may also contain provisions for adjusting the contracted price based on deviations from the "standard" commodity, for example, a contract might specify delivery of heavier [[USDA]] Number 1 oats at par value but permit delivery of Number 2 oats for a certain seller's penalty per bushel.

Before the market opens on the first day of trading a new futures contract, there is a specification, but no actual contracts exist. Futures contracts are not issued like other securities, but are "created" whenever [[open interest]] increases; that is, when one party first buys (goes '''[[Long (finance)|long]]''') a contract from another party (who goes '''[[Short (finance)|short]]'''). Contracts are also "destroyed" in the opposite manner whenever open interest decreases because traders resell to reduce their long positions or rebuy to reduce their short positions.

Speculators on futures price fluctuations who do not intend to make or take ultimate delivery must take care to "zero their positions" prior to the contract's expiry. After expiry, each contract will be [[Futures contract#Settlement|settled]], either by physical delivery (typically for commodity underlyings) or by a cash settlement (typically for financial underlyings). The contracts ultimately are not between the original buyer and the original seller, but between the holders at expiry and the exchange. Because a contract may pass through many hands after it is created by its initial purchase and sale, or even be liquidated, settling parties do not know with whom they have ultimately traded.