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What do the listed futures price, say, here, actually mean? I am confused because my understanding of futures is that any two people can enter into a contract at any price with any delivery date. Since these different parameters can vary freely based on the negotiation of the two parties involved, I am confused as to how a single price can encapsulate the potentially infinitely many unique futures contracts that exist for a given underlying. The same question applies to bonds trading in secondary markets, which are issued at various prices/interest rates, even for a given issuer and term length.

In other words, if I buy a future on the futures market or a bond on the bonds market, how do I know what I am actually getting? How does the market price of a bond or future render these infinitely many bonds and futures commensurate? It is not like I am buying a commodity, which is uniform at both a given point in time and across time.

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Futures are exchange traded and as such have regularised standard contracts, there will typically be one contract for each month going forward starting with the current month. Although the actual day on which the futures mature differs between exchanges it is typically on or around the 26th of the month. The major exception to which is the Korean market XKFE whose maturity days differ wildly. As well as these standard contracts some markets, particularly Eurex, offer "weeklies" which mature on a particular day, usually the Thursday of Friday, of that week in the month. For example a week 2 N17 future might mature on the 14th of July this year. The actual maturity day of contracts on each market will be made clear in the market's rules and regulations which will also lay out the standard contract terms such as lot size and contract multiplier. In rare circumstances these terms will vary for some underlyings or underlying asset classes.

It is a necessary feature of being exchange traded that contracts are standardised and discrete so that all participants know what they are buying, what they are getting, and all of the terms attached to the trade. If that were not the case the instruments could not be exchange traded.

When you are buying bonds you do buy a particular maturity that has been issued by the issuer. This means that you know the exact terms of the bond from the face details alone. Prices for bonds where there is no maturity available are interpolated.

Note that the price for a given maturity date for either bonds or futures can be safely interpolated due to time arbitrage considerations. For bonds we call this the "yield curve".

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my understanding of futures is that any two people can enter into a contract at any price with any delivery date.

No, futures are bought and sold from an exchange. Forwards are very much like futures but can have different terms. Futures are regulated and have uniform terms.

In other words, if I buy a future on the futures market ... how do I know what I am actually getting? ... It is not like I am buying a commodity, which is uniform at both a given point in time and across time.

It is very much like buying a commodity. The terms of the contract are uniform, and you have no credit risk (since you are transacting with the exchange and not directly with the third party).

or a bond on the bonds market,

Bonds are a different story. Bonds can have very different characteristics in terms of when coupons are paid, how they are calculated, if they are callable or convertible, etc. When buying bonds you need to 1) understand ALL of these characteristics and 2) understand how they affect the value of the bond.

  • Thank you for the clarification. I am still a bit confused as to how to interpret bond market yields and how the secondary bond market works. For example, the current 1 Month Treasury yield is 0.94%. Since 1 Month T-Bills are constantly sold by the Treasury at different interest rates, even within the same auction, what is the 0.94% referring to? All of those different types of 1 Month Treasuries? Or is it just some kind of "average" indicator that helps one gauge the current market value of the various "types" of 1 Month Treasuries outstanding? – Ryan da Silva Jul 7 '17 at 6:49
  • @RyandaSilva That's a separate question; the short answer is that the interest rates will be the same, but the yield is a measure of what you get versus what you pay for - the lower the market price, the higher the yield. The 0.94% yield means that you effectively earn 0.94% annually on what you pay for the bond. – D Stanley Jul 7 '17 at 13:29

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