Becoming Familiar With the Futures Market

1. Define the ___________ market and its functions and understand the functions of the futures exchange

2. Define a futures _____________ and understand its ________________ terms

3. Describe the different futures market participants

4. Understand the ____________ house and margins

5. Describe the difference between ________ and ___________ contracts

6. Describe carrying charges

Objective 1:

Defining the Futures Market

Objective 1: Defining the Futures Market

• The Futures Market is defined as: The __________ of trading futures contracts and __________ the facilitates that market many _______ products

Objective 1: The Functions of the Futures Market

1. Provide an ________ and _________ mechanism for the management of price risk

2. Provide an efficient mechanism for price _________

3. Provide a source of ___________ for decision making

4. Provide a means for _______ to secure additional __________ capital

Objective 1: The Functions of the Futures Exchange

1. To bring together in a ________ place a large number of ______ and ________

2. To ________ and _________ trading rules and _____________

3. To settle disputes4. To collect and __________

marketing information to the public

Objective 1:

• Define the futures market• Functions of the futures market• Functions of the futures exchange

Objective 2

Define a futures ________ and understand its ___________terms

Define a futures contract

o A _______ binding commitment to make or take __________ of a ____________ quantity and quality of a commodity at a predetermined ______ and time in the future, for a price determined by auction in the trading _____ of an exchange

o Price is determined by open __________. o Open outcry is when _______ are __________ in a pito The __________ of open outcry is that it is

______________ price _______________

Define A Futures Contract Cont.

There are ______ ways that a futures __________ can be settled.

o Deliveryo Less the ______ of all contracts traded is ___________ on.

o Offsetting. o Means to do the ____________ of what you had previously

done. o Example: if you had previously bought a contract, you

_____ it back. If you had sold one, then you _______ it back.

Standardized Terms

1. All terms for a futures contract are standardized, _____________ the price.

1. The price again is found by open outcry in the trading pit.

2. The __________________ terms include the following1. ______________ month –

1. month of contracts. 2. For example: March, May, July, September, December

2. _______________ Size – 1. Unit size of the contracts. 2. For Example: Grains are _________bu; Feeder cattle are

50000lbs and live cattle (fat Cattle) are ____________lbs

Standardized Terms Cont.

3. Place of ___________ – 1. if delivered on, the delivery _________

4. Minimum Price ________________ – 1. minimum ______________ in the price2. for example: ____ _________ in grains

5. ___________ daily price move – 1. Maximum it can ______ in _____ day2. for example 30 cents in wheat

Objective 2

• Define a Futures contract

• Standardized Terms

Objective #3

Describe the different futures market _______________

Objective 3: Describe the different futures market participants

1. There is a difference between ________ and ____________

1. __________1. ________ and ________ contracts for him or her

self – does not take customer orders

2. ___________1. take _____________ orders; may trade for him

or her self, but _________ responsibility is his customer

Objective 3: Describe the different futures market participants

1. We can __________ the people who are the futures market participants into several different categories. The general ____________ that trades would be in the last two categories: either public _______________ or ___________

1. __________ ____________: fill orders for outside speculators and hedgers

2. ______________ Speculators: trade for own accounts3. ____________ – buys and sells minute by minute4. ______ _____________ – take larger positions and

hold for longer, but usually not overnight

Objective 3: Describe the different futures market participants

5. ________ __________ – take large positions and hold for several days

6. __________: producers or users of commodities who seek protection against adverse price changes by taking a futures position opposite to cash position

7. __________ ______________: Place orders with brokers to profit from anticipated price changes. Not necessarily interested in owning the commodity, but only in profiting off movements in the price

Objective 4

Understand the ______________ and margins

Objective 4: Understand the clearinghouse and margins

• Clearing HouseoAssumes the _________ side of

every trade so that all ________ between buyers and sellers are severed

oBecause the number of buys _____ number of sells, the clearing house has no net position

Objective 4: Margins

1. To trade you must have an _____________2. With every new trade, traders must ________ money

called _________3. Margins serves as a deposit4. Initial margin: __________ deposit paid5. ________________ Margin: _____________ amount

of money that must be _______ in accounts6. Margins are _________ a __________ for trading

futures. Your margin money is a deposit in your account and if your trade is not a __________ trade, you will still have your margin money

7. The clearing house “_______-____-___________” all open positions at the end of a day to adjust all accounts

Objective 4: Margins Cont.

8. __________ _______ – when the equity in the traders account falls below the maintenance margin level

1. Must then deposit enough _______ to bring the __________ in the account back to the ____________ margin level

Objective 5:

Describe the difference between ________ and ________

positions

Objective 5: Short Position

The term to ______ is also known as a _______ position. To be short means that you are trying to ___________ the commodity in your possession from ___________ prices. ____________ are generally sellers of _______ position holders

Short = _________ = Protect from falling prices = ________________

Objective 5: Long Position

• The term to _______ is also known as a _________ position. To be long means that you are trying to protect the _____________ price of a commodity that you plan on obtaining from ___________ prices. Mills, _____________, and packers would be __________ position holders

• Long = _______ = protect from _____________ prices = Mills, factories, packers

Simple Rule:

•Buy _____ and _____ High in either order

Objective 6:

Describe ____________ charges

Describe carrying charges

1. __________ _________= the _______________ in the prices from one futures ____________ to another

Normal Market

1. ____________ ____________ = is ____________ price is lower than the ____________ contract price – so prices increase into the future. It reflects the cost of storage.

1. For example, if the nearby month is Dec and the Dec price is 2.32 and the March price ________ and the May price is 2.44 and the July Price is _________ and the Sept price is 2.57 then the market is ______________

2. Is _____________ when supplies are ___________3. Tells the trader what the __________ will pay for

___________4. Futures price spreads ____________ reflect full

_____________ charge

Inverted Market

1. Inverted Market = 1. nearby __________ are ___________ than distant

contract prices – So prices _________ into the future.

2. It reflects a __________ price of storage. In other words, we are in _________ demand of the product so the market price is telling you that they will pay ________________ if the product is delivered now – do not store the product until later.

1. For example, if Dec is the nearby month again, but this time the Dec price is 2.32, the March price is 2.28, the May price is ________, the July price is 2.16, and the Sept price is _________, now the market is _____________

Inverted Market Cont.

4. Usually prevails when supplies are ________

5. Market says they will pay a __________ if you deliver now

6. Reflects ______________ price of storage

Review and Summary

Now You Should Be Able To:

• Define the futures ___________and its _____________ and understand the functions of the ___________ exchange

• Define a futures contract and understand its _____________ terms

• Describe the different futures market _________________

• Understand the _______________________ and ________________

• Describe the difference between ___________ and ______________ contracts

• Describe _______________ charges

ANY QUESTIONS