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Reminder: Assignment #1

Reminder: Assignment #1. e-mail to seanfox@agecon.ksu Include a futures price quote, e.g. …. KC July Wheat closed @ 3020 ($3.20/bu) on Jan 20 Apr Live Cattle closed at 7355 ($73.55/cwt) on Jan 20 and the source of the information, cc to Chrisy Cundiff ccundiff@agecon.ksu.edu

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Reminder: Assignment #1

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  1. Reminder: Assignment #1 • e-mail to seanfox@agecon.ksu • Include a futures price quote, e.g. …. • KC July Wheat closed @ 3020 ($3.20/bu) on Jan 20 • Apr Live Cattle closed at 7355 ($73.55/cwt) on Jan 20 • and the source of the information, • cc to Chrisy Cundiff ccundiff@agecon.ksu.edu • Due: Friday, Jan. 25 (5 points)

  2. Video What did you learn? • Market participants ? • Purpose of futures markets ? • Hedging – what is it ? Why hedge? • Speculation – good or bad? • Liquidity ??

  3. Prices: Kansas City Wheat July 2002 contract. Open High Low Close Change Fri: 307.50 307.75 305.00 ???.?? -1.25 Tue: 304.00 305.00 302.00 302.00 -3.75 Wed: 301.00 see www.kcbt.com

  4. Same data - DTN (WA 336) July 2002 contract. High Low Close Change Fri: 3076 3050 ???? -12 Tue: 3050 3020 3020 -36 Wed:

  5. Same contract 2 years ago: July 2000 Contract. (as of Jan 2000) Open High Low Close Fri: 311.00 315.50 310.00 312.25 Tue: 309.50 313.75 302.00 312.75 Wed: 313.00

  6. More prices • Contracts trade for several delivery months • Wheat: July, Sep, Dec, Mar, May • Tuesday – DTN for KW (KC Wheat) High Low Close Change Mar: 2926 2900 2904 -32 Mar: 2982 2956 2960 -24 Jul: 3050 3020 3020 -36

  7. Livestock prices • Tuesday – DTN for LC (Live Cattle) High Low Close Change Feb: 7187 7112 7117 -37 Apr: 7480 7350 7355 -75 Jun: 7055 6975 6977 -60 Note •  $69.75/cwt; BUT 6977  $69.77½/cwt www.cme.com

  8. Futures Contracts • what they are • compare to forward contracts • who uses futures • why

  9. Definition • A futures contract: • is an agreement (a contract, a promise) between a buyer and a seller • that requires the seller to deliver and the buyer to accept delivery of: • a specified amount • of a specified commodity • at a specified location • on some (specified) future date

  10. “Short” and “Long” • Seller - is said to be “short the futures” or “short” • Buyer - is “long the futures” or “long”

  11. History • Grain markets • 19th century, Chicago grew as a grain terminal • at harvest -- oversupply -- grain dumped • 1848 - founding of the CBOT • established a “year-round”market by trading “to arrive” (forward cash) contracts • established quality standards

  12. Forward Contracts • Advantages • “assured” seller of a buyer and a price • Disadvantages • producer obliged to deliver • performance not guaranteed • not standardized • each item had to be negotiated • often difficult to find an opposite • not transferable

  13. Futures: Advantages vs. Forwards • Performance guaranteed • every buyer and every seller deposits “margin” money with the exchange • the exchange acts as a “middle-man” in every contract

  14. Futures Contracts -- Advantages 2. Standardized terms • quantity • quality • time • location • Only thing negotiated is PRICE

  15. Standardized ----> Transferable Obligations to deliver or accept can be transferred or “offset”. How? By entering into a 2nd contract equal and opposite to the original.

  16. Exchanges • CBOT Chicago Board of Trade Corn, SRW Wheat, SoyBeans • CME Chicago Mercantile Exchange Livestock, Hogs, Currencies • KCBT Kansas City Board of Trade HRW Wheat, • MidAm MidAmerica Commodity Exchange Mini Contracts (CBOT, CME commodities)

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