Category: 

What is a Contract Size?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 January 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
  • Print this Article

A contract size is the total amount of products or commodities that serve as the underlying assets for different types of investment contracts. Deals involving futures contracts, option contracts, and forward contracts typically have a specifically defined contract size, making it possible for the investor to evaluate just what type of commodity support exists for that contract. In some types of contracts, such as futures, the contract size defines the number of shares that is to be delivered by a certain date identified within the terms of the contract.

In many situations, there are standards for the number of shares that serve as the underlying asset for the investment contract. For example, it is not unusual for an equity options contract to be supported by a minimum of one hundred shares of that underlying asset. This means that if the option on that contract is actually exercised, the investor will receive a hundred shares of stock issued by the company that owns the underlying asset, with the transfer from owner to the contract holder taking place according to the provisions found within that contract.

Ad

Other standards for the contract size may apply in different situations. This is especially true when the underlying asset is a commodity of some type, such as a precious mineral. In most of the world, the contract size when minerals or metals are involved is defined in terms of troy ounces. As an example, a futures contract that involves silver may carry a contract size of at least five thousand troy ounces. Upon successful execution of the contract, the investor becomes the owner of that underlying asset, and is free to sell it at a profit.

It is important to note that while contract size does make it possible for investors to determine if the deal is large enough to be of interest, the size itself does not necessarily indicate what type of demand there will be for that underlying asset at some point in the future. Investors must still evaluate the potential of that asset, and determine if there is a good chance that it can be acquired for a reasonable price today, and generate a return within a reasonable period of time. This means looking closely at the type of asset used for the futures or options contract, considering future movements of the marketplace, and then deciding if the deal is worth the time and effort involved.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email