Price Limits in Futures Contracts
Futures exchanges impose a price limit on how much the futures price can change from the previous day’s settlement price. If traders want to trade at a price above or below this price limit, the trade will not take place. Till the time the price is outside the limit and no trade can take place, the price is locked limit, and the traders are locked in their positions.
Assume that the previous day’s settlement price of a futures contract was $3.06, and the daily price limit on the contract is 4 cents. In this can the contract can only trade between $3.01 and $3.11.
If the traders want to trade at $3.12, the trade will not take place. Instead the price will be reported at $3.11. Since the price has changed upto the maximum limit, it is said to have made a limit move and the price is said to be limit up. Similarly, if today’s settlement price was $3.01 it is said to be limit down.
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