Basic Futures Definitions
Download
Report
Transcript Basic Futures Definitions
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
[email protected]
515-294-3356
Chad Hart
Associate Professor
[email protected]
515-294-9911
Futures Markets
Organized and centralized market
Today’s price for products to be delivered
in the future
A mechanism of trading promises of future
commodity deliveries among traders
Futures and Options
Market tools to help manage (share) price
risks
Mechanisms to establish commodity
trades among participants at a future time
Available from commodity exchanges /
futures markets
Agricultural Futures Markets
Has some unique features due to the nature of agricultural
businesses
Supply comes online a few times during the year
So at harvest, supply spikes, then diminishes until the
next harvest
Production decisions are based price forecasts
Planting decisions can be made a full year (or more)
before the crop price is realized
Users provide year-round demand
Livestock feeding, biofuel production, food demand
Futures Market Exchanges
Competitive markets
Open out-cry and electronic trading
Centralized pricing
Buyers and sellers are both in the market
Relevant information is conveyed through the bids
and offers for the trades
Bid = the price at which a trader would buy the
commodity
Offer = the price at which a trader would sell the
commodity
CME Group
http://www.cmegroup.com/
Products
Agricultural commodities
Corn, soy, cattle, hogs, etc.
Energy
Currency
Metals
Weather
Others
Futures Contracts
A legally binding contract to make or take
delivery of the commodity
Trading the promise to do something in the
future
You can “offset” your promise
Standardized contract
Form (weight, grade, specifications)
Time (delivery date)
Place (delivery location)
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?
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2014/
Have a great weekend!