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What is a Contract Unit?

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  • Written By: Braden J.
  • Edited By: Jenn Walker
  • Last Modified Date: 20 September 2016
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A contract unit is a legal term that refers to the amount of the subject of a contract. Usually, this term is used in reference to the pre-set standardized amounts of futures contracts. Those standard amounts vary, usually based on the commodity. Just like cans of soda or bottles of beer are often sold in groups of six or 12, gold is typically sold in 100 ounce groupings. The contract unit for corn, on the other hand is 5,000 bushels, and the contract unit for coffee is 37,500 pounds (17 metric tons).

Though the term "contract unit" is typically used in relation to futures trading, it can also be used generically to cover the amount of the subject of most any type of contract. For example, in a contract that exchanges money for 50 custom printed t-shirts, one might refer to the 50 t-shirts as the contract unit. Still, the term is primarily used in reference to future contracts.

A futures contract is an agreement to buy or sell an asset at a specified price and time in the future. These agreements are a common type of derivative, which is to say that they themselves are not assets, but their value is based on the rights that they may exercise in the future over an underlying asset, like a stock, bond, currency, or commodity. It is with regard to this last item — commodities — that the concept of a "contract unit" is usually used in reference to.

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Futures contracts and contract units are standardized largely to help make engaging in those types of agreements easier. Contracts can have many aspects, such as quantity, price, the currency the buyer may pay with, and a delivery date imposed on the seller. The more elements up for negotiation, the more debate the parties to the contract may engage in and the longer it can take to seal the deal. By having a standard quantity of the subject of the contract, however, parties to the contract can reduce the amount of negotiating involved in coming to an agreement.

The term "contract unit" may also be used in reference to a forward contract. Like a futures contract, a forward contract also grants the right to purchase or sell an asset in the future. Forwards, however, are not standardized. Rather, the transacting parties draw up contract terms tailored to their particular needs. The quantity of that non-standard contract may still, however, be referred to as a contract unit.

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