Common use of Contract Unit Clause in Contracts

Contract Unit. The contract size of a single JGB Futures contract is JPY 100 million, suggesting that buying or selling one unit of JGB Futures contacts is equivalent to holding long or short position amounts to JPY 100 million worth of JGB Futures. This amount of JPY 100 million is referred to as “notional contract value (or notional amount).” As shown in Figure 3, the current average daily trading volume of 10-year JGB Futures is about 40,000 contracts or JPY 4 trillion on a contract notional value basis. 4 For more details about the itayose method, refer to JPX’s website from the link below. ▇▇▇▇▇://▇▇▇.▇▇▇.▇▇.▇▇/english/derivatives/rules/trading-methods/index.html To buy one unit of JGB Futures, equivalent to the notional amount of JPY 100 million, investors do not need to prepare JPY 100 million. Instead, investors only need to pay the futures margin required, calculated according to their positions. Futures margins are measured by a calculation methodology called SPAN®, or the Standard Portfolio Analysis of Risk, and its fundamental objective is to cover future losses arising from current positions by using the expected price volatility (implied volatility) of the futures contracts.5 Suppose a futures margin of JPY 1 million is required to buy one JGB Futures contract. In this case, an investor can take the position of JPY 100 million in terms of the notional value of JGB Futures with collateral of JPY 1 million. This suggests that the investor can trade with 100 times leverage (100 million/1 million) using JGB Futures. Since the futures margin is calculated based on parameters such as expected price volatility, the level of leverage depends on the market conditions at that time. Note that the futures margin measured by SPAN® is the minimum required amount between a CCP and a trading participant, and investors can reduce the level of leverage by increasing the deposited futures margin amount. The month in which futures contracts expire is called the contract month. The delivery date for JGB Futures is the 20th day of each contract month (or if it falls on a business holiday, the following day), and the last trading date of the contract month is the 5th business day prior to the delivery date. As mentioned above, JGB Futures have quarterly contract months in March, June, September, and December, and the contracts of the upcoming three can be traded. For example, as of January 2021, the listed contract months of JGB Futures are March-2021, June-2021, and September-2021s. When the March-2021 contract month is expired, a new contract month, the December-2021 contract month, will be launched. In the JGB Futures market, a contract month whose last trading date is closest to the current date, the March-2021 contract in the above case, tends to be the most actively traded, and such a contract month is called an active month contract. Investors typically trade the nearest contract month: the March-2021 contract month in the above case. As the last trading date for this contract month approaches, investors roll their positions to the following nearby contract month (the June-2021 contract month in the above case). As such, one contract month is only actively traded for three months in practice, although theoretically it can be traded for nine months. As shown in Figure 3, when using time series price data of JGB Futures contracts, prices of the nearest active contract months are usually combined.