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Futures Marketing Section II Mechanics of Futures Trading

Futures Marketing Section II Mechanics of Futures Trading. Price Discovery. Buyers and sellers interacting with information to arrive at a price through negotiation. Futures Market Price. A source of what buyers and sellers think a commodities worth, at some point in the future, today. .

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Futures Marketing Section II Mechanics of Futures Trading

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  1. Futures MarketingSection II Mechanics of Futures Trading

  2. Price Discovery • Buyers and sellers interacting with information to arrive at a price through negotiation.

  3. Futures Market Price • A source of what buyers and sellers think a commodities worth, at some point in the future, today.

  4. Futures Contract • A transferable agreement to make or take delivery of a standardized amount of a commodity of minimum quality during a specific month. • Every contract identical except for price.

  5. Terms of a contract • Commodity • Price • Quantity • Quality • Time of Delivery • Place of Delivery • Terms of Payment

  6. Additional Terms Related to the Futures Contract • Price Quotations and Price Fluctuations • Maximum Daily Price Change (limit move) • Volume of Trade • End of Delivery Month Trading Suspension • Bearish • Bullish

  7. Delivery Months Basis for Selection • Natural Climatic Months • Concentration of Volume of Trading • Inertia

  8. Settlement of a Futures Contract • Delivery • Short - make delivery Long – take delivery • Offsetting Transaction • Reversing position with offsetting contract, if you were short in the market you would buy a contract.

  9. Mechanics of Delivery • NOI – Notice of Intent to deliver short position • First Notice Day – Sent by short position to oldest long position • Delivery Day- • Retendering-

  10. Functions of the Clearing House • Reconciliation of all futures contracts • Assuring the financial integrity of all transactions

  11. Characteristics of Clearing House • Separate from exchange • Membership is very limited, must be members of the exchange • Requirements for membership are stringent • Stock Corporation • Members must deposit substantial money

  12. Notice of Intent Scenario short LS LS LS L A B C D E Clearing House

  13. Concept of Long and Short Long ------------- Buy Short -------------Sell

  14. Open Interest 1 long + 1 short = 1 open contract

  15. Open Interest Example A sells to B A- Short B- Long C sells to B A- Short B-Long 2 contracts C- Short Open Interest = 2 Volume = 4

  16. Volume and Open Interest CBOTNovember Soybeans as of Friday

  17. Volume and Open Interest CBOTJanuary Soybeans as of Friday

  18. Selecting a Brokerage House • Broker with Experience • Knowledge of Commodity • Convenience • Willingness to Service Account

  19. Purpose of Margin • Secure Position of Trader • Solvency of Clearing House They take opposite sides of transaction

  20. Margin Accounts • Separate for each customer • Audited frequently – see if posted properly and not being used • Commission House cannot use money • Amount can vary from one brokerage house to another • Does not pay interest

  21. Initial Margin –amount you must post at origination of contract • Sell Contract – post $3,000 margin for soybeans. (5 to 15 % of contract) • What happens if price goes up? • Contract Losing Money • Effective Margin has been eroded. • When the EM reaches the call point you must post new margin money to bring you account back to the original level of margin.

  22. Example -- Margin Call • Sell November Soybeans at $7.00 must post margin of 10 % of contract value. • Post Margin of 10 % of ($7 * 5,000 bushels) • Margin posted $3,500, call point is $2,000 • If price increases to $7.40 what is the effective margin? • EM = $1,500, EM < Call Point must post new margin monies.

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