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AGEC 420

AGEC 420. $$$$ ! Checks payable to “Fox Investment Club” $10 required + $10 optional for investing Form groups of 3 Notify me by e-mail due Fri., Feb 1. Last time. 1. Guaranteed performance exchange is an intermediary in all trades margin requirements for buyers and sellers

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AGEC 420

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  1. AGEC 420 • $$$$ ! • Checks payable to “Fox Investment Club” • $10 required + $10 optional for investing • Form groups of 3 • Notify me by e-mail • due Fri., Feb 1 AGEC 420, Lec 4

  2. Last time 1. Guaranteed performance • exchange is an intermediary in all trades • margin requirements for buyers and sellers 2. Standardized • allows for offsetting • by taking an opposite position in a 2nd contract • > 95% of positions are offset – not delivered AGEC 420, Lec 4

  3. Topics for Today • Bar chart basics • Price limits • Margin • Functions of futures markets • Hedging • what it is • how it works • Basis AGEC 420, Lec 4

  4. KWN2 - DTN High Low Close Change Fri: 3076 3050 3056 -12 Tue: 3050 3020 3020 -36 Wed: 3022 3000 3016 -02 Thu: 3040 3006 3040 +22 Fri: 3080 3030 3076 +36 Today – opened at ???? www.kcbt.com AGEC 420, Lec 4

  5. Futures Contract Price Limits largest permitted change from the previous closing price Example Soybeans -- limit is +/- 50c/bu Friday: Nov. beans closed at $4.43¾ c/bu Today’s permitted range is -- $3.93¾ to $4.93¾ At $3.93¾, market is “limit down” At $4.93¾, market is “limit up” AGEC 420, Lec 4

  6. Price Limits - Examples CommodityLimit +/- Corn $0.20/bu Soybeans $0.50/bu Wheat $0.30/bu Live/feeder cattle $1.50/cwt Note: limits can be expanded AGEC 420, Lec 4

  7. Margin Money deposited by both buyers and sellers at the outset of the trade • ensures contract performance • held in your margin account by your Futures Clearing Merchant (FCM) • accounts are adjusted daily -- “marked-to-market” to reflect gains/losses in contract value.. AGEC 420, Lec 4

  8. Margin • Initial margin • amount of the initial deposit • Maintenance margin • minimum amount that must be maintained • Margin call • request for additional funds when balance falls below maintenance level AGEC 420, Lec 4

  9. Margin Account - Example KW: Initial = $500, Maint. = $400 Mon: Buy 1 July wheat @ 3.08, close @ 3.08 Deposit $510 ($500 initial margin; $10 commission) Balance in Margin Acct. is $500, Tue: Close @ 3.04 --> loss of 4c/bu = $200 Balance now $300, receive margin call for $200 to restore initial level. AGEC 420, Lec 4

  10. Margin Account – Example (cont.) Wed: Close @ 3.08 --> gain of 4c/bu = $200 Balance now $700, Thu: Sell @ 3.10 --> gain of 2c/bu = $100 Balance now $800, Calculate Profit: Balance = $800 minus $500 initial margin minus $200 margin call minus $20 commission (2 x $10) = $80 AGEC 420, Lec 4

  11. Margin Levels • Set by the exchange • Can be increased in response to increased price volatility AGEC 420, Lec 4

  12. Commissions • Set by your broker • Varies by exchange, by commodity, and by type of trade. • Range: $20 to $200 !! • Buchanan & Co. • Grains @ MCE: $25 per round turn ($12.50 in and out) • Cattle @ MCE: $30 AGEC 420, Lec 4

  13. Functions of Futures Markets 1. Risk transfer: • from Hedgers • who want to manage (reduce) risk • to Speculators • willing to accept risk 2. Price discovery: • provide market’s best guess of the future price • reflects available info. on future supply and demand AGEC 420, Lec 4

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