Contract Unit

What Is a Contract Unit?

The term "contract unit" refers to the quantity of the underlying asset represented by a single derivatives contract. Depending on the nature of the contract, the underlying asset could be whatever is traded on the derivatives exchange, from agricultural commodities and metals to currencies and interest rates.

Since futures contracts are profoundly standardized, the contract unit will specify the exact amount and specifications of the asset, like the number and quality of barrels of oil or the amount of foreign currency. On account of equity options, for example, every contract corresponds to 100 shares.

How Contract Units Work

Derivative markets have become an increasingly important part of the global economy. Through them, industrial customers can efficiently source large quantities of commodities through a single centralized marketplace.

This enjoys the benefit of decreasing transaction costs, increasing transaction fees, and reducing counterparty risk through clearinghouses and other systems. Financial buyers additionally actively participate in derivative markets, for purposes, for example, speculating on commodity prices or engaging in risk hedging activities.

One of the key components of every derivative contract is its contract unit. This critical clause captures the quantity and type of commodity being traded for each derivative contract.

Commodities are principally offered through the exchanges of the CME Group, and contract units can be found on the exchange websites.

For example, assuming someone gets one corn futures contract, they are really buying 5,000 bushels of corn, whereas on the off chance that someone gets one oil contract, they are buying 1,000 barrels of oil. Gold futures, meanwhile, have a contract unit of 100 troy ounces.

In the event that the unit is too large, numerous investors and traders who wish to hedge smaller exposures will be unable to use the exchange. Likewise, in the event that the contract unit is too small, trading becomes expensive since there is a cost associated with each contract traded.

To help address this concern, some exchanges have introduced the concept of "mini" contracts to draw in and retain smaller investors. By making it easier for these small investors to participate in the derivative markets, exchanges hope to increase the total liquidity of the market, thereby benefiting all investors.

Real-World Example

Different futures contracts can have different contract units even assuming they are inside the same asset category. For example, a CAD/USD futures contract traded on the Chicago Mercantile Exchange (CME) has a contract size of 100,000 CAD, while a Micro E-mini contract likewise traded on the CME has a size of 10,000 CAD.

Investors need to understand the conventions of the exchange they choose to trade on. Otherwise, they could accidentally expose themselves to a transaction whose value is far greater or lesser than whatever they had expected. It is imperative that anyone buying or selling futures contracts knows about these differences and not assume that the unit of the currency will be the same across the board.

Contract Unit versus Trading Unit

A trading unit, as defined by Nasdaq, is the number of shares of a security that is used as the acceptable quantity for trading on an exchange. Unlike a contract unit, a trading unit does not include a derivative as there is no underlying asset, it is specifically a number of shares that an exchange deems are needed for a security to trade on an exchange, generally in terms of blocks.

On the off chance that a trader is taking delivery of one contract unit, they are not taking delivery of one piece of a commodity, yet the amount of the commodity stipulated in that contract; for example, 5,000 bushels of corn in one contract.

A trading unit is normally a requirement set by an exchange to ensure that trading is facilitated efficiently and that there is enough liquidity. Trading units are often as round parts or odd parcels.

Round lots are normally 100 shares of stock while odd lots are a number less than 100. Understanding how a specific exchange defines a round parcel or odd part is critical for an investor to know when pursuing trading choices.

The Bottom Line

In the derivatives market, a contract unit refers to the quantity of the underlying asset in a derivatives contract. Knowing the contract unit of a derivative is essential as it relays to an investor the amount of that asset they are buying or selling. This effects the performance for speculators as well as price risk moderation for hedgers.

Features

All contract units are standardized on each specific exchange.
Different exchanges will have different conventions for their contract units, even relating to the same commodity.
Contract units differ from trading units, as trading units specify the number of shares in a given block as deemed by an exchange.
Contract units are an important part of a derivative contract, as they specify the quantity of the underlying asset associated with each contract.
Knowing the quantity of an asset is important for speculators and hedgers as it provides them with the knowledge of the amount of the underlying asset they are buying or selling.

FAQ

What Is a Round Lot?

A round part refers to a specific number of shares traded as a block as determined by an exchange. One round parcel is equal to 100 shares of stock. It can likewise be a larger number however for the most part needs to be divisible by 100.

What Is the Trading Unit for Corporate Bonds?

The trading unit for corporate bonds is generally $1,000 or $5,000. In some cases, it very well may be $10,000.

A trading unit isn't the exact same term as a share. A share is the smallest denomination of the stock of a company. When purchasing stock of a company, you purchase a share or multiple shares. A trading unit refers to a specific number of shares in a purchase, most frequently referring to block trades. So a trading unit is made up of a specific number of shares.

What Is a Stock Trading Unit?

A stock trading unit refers to the number of shares that an exchange deems acceptable for trading as a block. Stock trading units are either odd parts or round parcels. Round parts mean a block is equal to 100 shares while odd parcels are a number below 100, generally determined by the specific exchange.

What Is an Odd Lot?

An odd part refers to a specific number of shares traded as a block as determined by an exchange that is less than a round parcel, or 100 shares. Round parcels (100 shares a block) are considered the standard, and anything short of that is considered an odd part.