Basic Futures Definitions and Margin Calls
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Transcript Basic Futures Definitions and Margin Calls
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
[email protected]
515-294-3356
Chad Hart
Associate Professor
[email protected]
515-294-9911
Soybean Futures
Form
5,000 bushels
No. 2 Yellow Soybeans (at price), No. 1
Yellow soybeans (at 6 cents over price), and
No. 3 Yellow Soybeans (at 6 cents under
price)
Time
Contract months: Sept, Nov, Jan, Mar, May,
July, and August
Source: CME Group
Soybean Futures
Partial listing of delivery points
Source: CME Group Rulebook
Delivery Points
Corn
Soybeans
Wheat
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Futures Contracts
No physical exchange takes place when the
contract is traded (no actual commodity moves)
Payment is based on the price established when
the contract was initially traded (prices can and
will change before delivery is taken)
Deliveries can be made when the contract
expires or the offsetting futures position must be
taken to settle up
Deliveries occur on less than 5 percent of the traded
contracts
Market Positions
You can either buy or sell initially to open a
position in the futures market
“Make” a promise to make or take delivery
Do the opposite to close the position at a
later date
“Offset” the promise (and no commodity changes
hands)
Trader may also hold the position until
expiration and make or take physical delivery
of the commodity
Trading Futures Contracts
All trades through a licensed broker
Brokerage house has a “seat” at the
exchange and is allowed to trade
Represented “on the floor” to exercise trade
Local broker to initiate transaction and
manage account with client
Full service and discount brokers
CME Group
http://www.cmegroup.com/
Open, High, Low, Last Price
Settlement Price
Volume
Open Interest
Daily Limits
Terms and Definitions
Basis
The difference between the spot or cash
price and the futures price of the same or a
related commodity.
Bear
Someone that thinks the price will decline
Bull
Someone that thinks the price will increase
Cash vs. Futures Prices
Iowa Corn in 2013
The gap between the
lines is the basis.
2013 Basis for Iowa Corn
Terms and Definitions
Clearing House
The division of the futures exchange through
which all trades made must be confirmed,
matched and settled each day until offset or
delivered.
Commission
For futures contracts, the one-time fee
charged by a broker to cover the trades you
make to open and close each position.
Terms and Definitions
Long position
A position in which the trader has bought a
futures contract that does not offset a
previously established short position.
Short position
A position in which the trader has sold a
futures contract that does not offset a
previously established long position.
Going Short
Sold Dec. 2014 Corn @ $4.55
What type of trader (bull or bear) would go short?
What events would send prices in a favorable direction?
Going Long
What type of trader (bull or bear) would go long?
Bought Nov. 2014 Soybeans @ $11.20
What events would send prices in a favorable direction?
Margin Accounts
A margin account is an account that traders maintain
in the market to ensure contract performance. There
are minimum limits on the size of the account.
Crop
Corn
Soybeans
Lean Hogs
Live Cattle
Trader Type
Hedger/Speculator
Hedger/Speculator
Hedger/Speculator
Hedger/Speculator
Initial
$2,363
$3,915
$1,350
$1,013
Maintenance
$1,750
$2,900
$1,000
$ 750
To trade, you must create a margin account with at
least the “Initial” amount and maintain at least the
“Maintenance” amount in the account at the end of
each trading day.
Margin Calls
Margin accounts are rebalanced each day
Depending on the value of futures
Settlement price
If your futures are losing value, money is taken out
of the margin account to cover the loss
If the account value falls below the “Maintenance”
level, you receive a margin call (a call to put
additional money in your margin account) and the
balance is brought back up to the Initial amount
Margin Example
Let’s say I went short on Mar. 2014 corn
$4.345/bushel on Jan. 13
Along with selling a corn futures contract, I have to
establish a margin account and deposit $2,363 in it
On Jan. 17, the Mar. 2014 corn futures price moved
to $4.24/bushel
Since I’ll be buying the futures contract later, this
price move is in my favor
Margin Example
I gained 10.5 cents per bushel and since the contract
is for 5,000 bushels, that’s a gain of $525
At the end of the day (Jan. 17), $525 is deposited
into my margin account, raising the account balance to
$2,888
Since $2,888 is greater than the “Maintenance” level,
I will not receive a margin call
Margin Example #2
Let’s say, instead of going short, I went long on May
2014 corn
$4.4775/bushel on Dec. 11
Along with buying a corn futures contract, I have to
establish a margin account and deposit $2,363 in it
On Jan. 17, the May 2014 corn futures price moved
to $4.3175/bushel
Since I’ll be selling back the futures contract later,
this price move is not in my favor
Margin Example #2
I lost 16 cents per bushel and since the contract is
for 5,000 bushels, that’s a loss of $800
At the end of the day (Jan. 17), $800 is to be taken
from my margin account, lowering the account balance
to $1,563
Since $1,563 is less than the “Maintenance” level, I
will receive a margin call and be asked to deposit $800
more into the account or to close out the futures
position
The $800 brings the account balance back up to
the initial requirement
Margin Example – Going Short
Date
Price
Gain
Margin
Call
Account
Balance
$2,363
1/10/14
$4.4075
1/13/14
$4.425
-$87.50
$2,275.50
1/14/14
$4.395
+$150
$2,425.50
1/15/14
$4.335
+$300
$2,725.50
1/16/14
$4.355
-$100
$2,625.50
1/17/14
$4.3175 +$187.50
$2,813
Margin Example – Going Long
Date
Price
Gain
Margin
Call
Account
Balance
$2,363
1/10/14
$4.4075
1/13/14
$4.425
+$87.50
$2,450.50
1/14/14
$4.395
-$150
$2,300.50
1/15/14
$4.335
-$300
$2,000.50
1/16/14
$4.355
+$100
$2,100.50
1/17/14
$4.3175
-$187.50
$1,913
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2014/
See you at lab, Heady 68!