What is meant by "daily price limit" in the context of futures?

The concept of "daily price limit" in the context of futures trading refers to the maximum allowable price fluctuation for a contract within a single trading day. This mechanism is put in place by exchanges to prevent extreme volatility and to maintain an orderly market. By limiting how much a price can move up or down in one day, it allows traders to manage their risk more effectively and helps prevent runaway price movements that could destabilize the market.

Daily price limits are critical because they ensure that significant news or events affecting a commodity do not lead to excessive price swings in a single day, which could create panic or unfair trading conditions. It is especially important in fast-moving markets where prices can be influenced dramatically by sudden changes in supply and demand dynamics.

The other options do not accurately describe the daily price limit. The minimum price for future contracts does not capture the regulatory framework governing price movements. The average price of commodities refers to a statistical measure rather than a limit on price fluctuation. The total volume of commodities traded relates to the quantity of contracts exchanged rather than the price behaviors. Hence, the definition of daily price limit being the maximum allowable price fluctuation is an essential aspect of how market integrity is maintained in futures trading.