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## Futures Tick and Daily Price Limit

In this article we are going to review how futures contracts are priced in the marketplace. We’re going to take a look at the price of futures contracts and how Futures are traded on the exchange.  It is important to note that the exchanges set all of the standardized terms for every contract and all contracts are for a stated number of units. For example, 5,000 bushels of wheat, 1,000 barrels of oil or 100 Troy oz of gold, all of the contracts are for a standard number of units and all contracts are priced on a per-unit basis.  The minimum price variation or the minimum price change, is the smallest amount by which the price of the contract can change from the previous transaction. This increment is known as a tick. In order to understand some of the pricing dynamics regarding the trading of Futures contracts review the following examples:

Corn – For a corn contract the minimum price variation or tick is 1/4 of one cent, that’s one quarter of \$0.01 per bushel, times 5,000 bushels, making the value of one tick on a corn contract worth \$12.50. If a corn contract increased by one tick from the previous transaction the value that contract increased by \$12.50

Gold – For a gold contract each contract covers 100 troy ounces. Some of you may be asking what a troy ounce is? A troy ounce is slightly less than 1.1 Oz, it’s a little bit of a different measure of an ounce, and that is how the contract units were established by the exchange. It is not important that you know exactly what a troy ounce is, but you will see that terminology on the exam and don’t let it throw you. So every gold contract covers 100 troy ounces of gold and the minimum price variation or tick for a gold contract is \$0.10.  To determine the value of the tick for each contract, use the following formula: 10 cents per ounce x 100 oz, the value of a tick for gold contract is \$10.

Daily price limit

Now let’s take a look at the example of what can happen when a contract goes into a state of limit up or limit down.

EXAMPLE

We hope that this article has helped you better understand futures contracts are priced and traded on the exchanges.

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