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Standard Terms in a Futures Contract

Standard Terms in a Futures Contract. Quantity Quality Expiration Months Delivery Terms Delivery Dates Minimum Price Fluctuations (tick) Daily Price Limits Trading Hours. CBOT Corn Futures Contract. 5,000 bushels

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Standard Terms in a Futures Contract

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  1. Standard Terms in a Futures Contract • Quantity • Quality • Expiration Months • Delivery Terms • Delivery Dates • Minimum Price Fluctuations (tick) • Daily Price Limits • Trading Hours

  2. CBOT Corn Futures Contract • 5,000 bushels • No. 2 Yellow at par and substitutions at differentials established by the exchange • March, May, July, September, December • Warehouse Receipt in Chicago, Toledo or St. Louis. • Last delivery day is the last business day of the delivery month. • 1/4 cent ($12.50 per contract) • 12 cents ($600 per contract) • 9:30 a.m. - 1:15 p.m. Chicago time, Mon-Fri. Trading in expiring contracts closes at noon on the last trading day. Project A® overnight session hours are from 9:00 p.m. -4:30 a.m. Chicago time, Sun-Thu

  3. Buying a Futures Contract • “Long” Position • Agreement to Accept Delivery of the Commodity in the Delivery Month and Pay the Contracted Price

  4. Selling a Futures Contract • “Short” Position • Agreement to Make Delivery of the Commodity in the Delivery Month and Receive the Contracted Price

  5. Ways a Contract Can Be Settled • Settlement through Delivery (longs accept delivery from shorts). • Cash Settlement in delivery month (if defined in the contract). • Exchange for Physicals (EFPs) • Offset - take opposite, but equal position in the futures market.

  6. Offsetting a Futures Contract • Today: Sell 1 Dec Wheat @ $2.85 • Obligation to deliver wheat at a CBT approved warehouse in December and will be paid $2.85 ( delivery discounts). • October 30: Buy 1 Dec Wheat @ $3.00 • Obligation to accept wheat at a CBT approved warehouse in December and will pay $3.00 ( delivery discounts). • The two contracts cancel each other, the trader settles the price difference of 15 cents.

  7. Example of Cash Settlement Basic Formula Price (BFP) Milk • Cash Settlement against the USDA announced BFP for the month. • June 1: Buy 1 July BFP Milk Futures: $13.14 cwt • August 5: July BFP Announced by USDA: $13.59 • Contract is cash settled at $13.59 and the trader is paid 45 cents.

  8. Clearinghouse • Guarantees all contracts • Assures that each trader honors contract obligations. • Assumes opposite position to every traders’ position. • A buyer to every seller • A seller to every buyer. • Facilitates delivery.

  9. Sally Short Sell 1 Dec Corn @ $2.20 Larry Long Buy 1 Dec Corn @ $2.20 Clearinghouse Sell 1 Dec Corn @ $2.20 to Larry Long Buy 1 Dec Corn @ $2.20 from Sally Short -No net position for the clearinghouse

  10. Clearinghouse • Requires margin funds for each position. • Margin: a small sum of money which serves as a performance bond on the contract. • Profits and losses on a futures position are paid daily (marked-to-market) in reference to the settlement price.

  11. Margin • Initial Margin - amount of money a trader must post to the clearinghouse for taking a position in the futures market. • Maintenance Margin - Minimum balance that must be maintained by a trader. • Margin Call - When margin balance falls below maintenance margin. Enough funds must be sent to bring margin balance back to initial margin.

  12. Margin Requirements per Contract Commodity Initial Maint. Contract Value Corn $540 $400 $11,500 (5%) Wheat $675 $500 $14,000 (5%) Soybeans $1,000 $800 $22,500 (5%) L. Cattle $600 $450 $26,000 (2%) F. Cattle $1,000 $750 $34,000 (3%) Hogs $1,200 $900 $18,000 (7%) Pork Bellies $1,700 $1,300 $21,000 (8%)

  13. Margins and Marking-to-Market Sell 1 Nov. Soybean futures contract at $4.75. Initial margin=$1,000 and maintenance margin=$800 Day Settlement Price Profit Margin Balance 1 $4.75 0 $1,000 2 $4.70 +$250 $1,250 3 $4.72 -$100 $1,150 4 $4.76 -$200 $950 5 $4.81 -$250 $700 => Margin Call on Day 5 of $300 to bring margin balance to initial level

  14. Traders & Brokers • Floor Trader • Independent • Broker • Futures Commission Merchant (FCM) • Introductory Broker/Account Exec (IB) • Commodity Trading Advisor (CTA) • Commodity Pool Operator (CPO)

  15. Full Membership Prices (8/13/99) • CBOT $578,000 • NYMEX $560,500 • CME $345,000 • NYBOT $113,000 • KCBT $73,000 • MGEX $14,000 • MIDAM $4,500

  16. Speculators • On-floor versus Off-floor • Scalpers • Day Traders • Position Traders • Spread Traders • Fundamental Analysis vs. Technical Analysis

  17. Futures Markets Regulators • Brokers • Exchange/Clearinghouse • National Futures Association (NFA) • Commodity Futures Trading Commission (CFTC)

  18. Broker Regulation • Broker represents his/her customers to the exchange and clearinghouse • Ensure customer activities are proper • “Know your customer”

  19. Futures Exchange • Establish and enforce trading rules for members • Exchange rules prohibit: • Prearranged Trading • Front Running • Does self-regulation work?

  20. National Futures Association (NFA) • Screening and testing applicants for registration (Series III - National Commodity Futures Exam) • FCM, IB, CTA’s and CPO’s are required to be registered with the NFA • NFA can audit, suspend or expel registrants for infractions.

  21. Commodity Futures Trading Commission (CFTC) • Government agency responsible for regulating the futures industry. • Approval of new contracts. • Price limits and delivery. • Price manipulation. • SEC vs CFTC

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