Posted in Finance, Accounting and Economics Terms, Total Reads: 126
Definition: Limit Move
Limit Move is the range in which the price of a futures contract can vary. The price range of a futures contract on a commodity is set by the futures exchange beyond which the spot prices of the contract cannot move.
Generally the limit move is put to protect investors against the volatility risks. Investors could be hurt by the high volatility of a commodity. So the exchange puts a minimum and maximum price limits to a futures contract trading price. If the trading price of the commodity’s future reaches the limit price, the trading halts at that point of time. The trading halt is temporary until the news affecting the prices subsides out. The halt puts ease to the panic buy and sell on the market. The limit set as the limit move is also known as lock limit.
For Example: Suppose a futures contract of a commodity X is trading at $10.5. Now suppose the exchange puts a limit move on the futures contract of X with range $8 to $ 12. Now, suppose if suddenly due to some news the price of future contract tends to become higher, the price cannot go beyond $12 due to the limit move.